COUNTERINTUITIVE ECONOMIC CONSEQUENCES OF
ACCOUNTING POLICIES: A DYNAMIC ANALYSIS
by
Miklos Vasarhelyi*
Research Working Paper No. 289A
January 1983
*Associate Professor, Columbia University
This paper is in preliminary form and is not to be quoted or
reproduced in whole or in part without the written consent of
the author, Comments would be appreciated.
The participation of Professor W. Thomas Lin of the University
of Southern California in the early phases of this project, the
comments of Professors Brian Conley of USC and Enrique Arzac of
Columbia University and the research assistance of Mr. Tan Daley
are gratefully acknowledged.
GRADUATE SCHOOL OF BUSINESS
COLUMBIA UNIVERSITY
NEW YORK, NEW YORK 10027
ABSTRACT
This paper uses a system dynamics simulation
methodology to assess the potential effects of new
accounting policies being considered by rule formulating
bodies.
The key objective of this paper is to demonstrate that
current ex-ante intuitive assessment of. the effect of
Proposed accounting rules is inadequate due to the
counterintuitive nature of economic consequences in a
complex social system. For this purpose a very simplified
model of the US economy is developed and its parameters
varied to reflect potential accounting policy changes. The
effects of these policy changes are-shown to be
counterintuitive in nature, requiring consideration of
Second and third harmonics of the feedback loops for
adequate ex-ante impact assessment.
This paper is divided into six parts: the first part
describes alternate approaches to economic consequence
assessment and the advantages and disadvantages of utilizing
the system. dynamics methodology; the second part describes
the skeleton of the system dynamics model; the third part
examines the measurement problems of rates, levels and
delays as well as reviews the details of their computation
for model formulation; the fourth part discusses the
Problems and results of model validation efforts; the fifth
Part describes some of the results obtained from application
of the model, and their meaning in comparison with
traditional methodologies for accounting impact analysis;
the sixth part concludes by suggesting the next step for
Macro-accounting modeling: evaluating the potential and
shortcomings of this methodology.
11
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OUTLINE
Introduction
Approaches to Accounting Impact Analysis
The Structure of the Model
A. An Initial Model
Generation of Business Activity
Borrowing, Interest, Saving and Dividend Cycle
Inventory Cycle
Government Papers Cycle
Taxation Cycle
Sales, Inventory and Salary Flows
Measurement Problems
A. Level values
B. Flow Rates
C. Curve Forms and Delay values
D. Data Used
Validation
A. Model Logic
B. Predictive Validity
Results and Experimental Method
A. Preliminary Analysis
B. Effect of Depreciation Method
c. Restructuring of Debt
D. Capitalization of Interest
E. Inflation Accounting
Conclusions
INTRODUCTION
Economic consequence research is of interest not only
to standard setting bodies but also to vested interest
groups. These must be able to understand the actual
consequences of accounting rules in order to be able to
direct their event influencing actions. Simplistic
extrapolation models are inadequate for this purpose as
economic consequences may be counterintuitive in nature,
Watts and Zimmerman (1979, p.301) state that
"Not only is there no generaily accepted
accounting theory to justify accounting standards,
there never will be one.*
This argument is based on the assertion that standards are
justified by the needs of vested interest groups, and that
@ifferent groups prevail on different issues--which leads to
the adoption of an inconsistent set of theoretical
justifications across different topics. Buckley (1976)
calls for an analysis of the impact on the economy before
the FASB makes any new major decision. Rappaport (1976)
also suggests that
". . . a responsible. posture of accountability
calls for the explicit consideration of the
economic impact of financial accounting standards
by all accounting policymaking bodies. In the
particular case of the FASB, such analysis will
hopefully enable it to remain a major force in
Shaping. financial reporting practices.”
Economic consequence methodologies were examined in a
conference sponsored by the FASB in July, 1978. Of the six
studies presented, four (Markin, Dhalival, Abdel-Khalik et
al., and Harrison) used “efficient market" methodologies to
evaluate the impact of particular accounting rules, while
the remainder used macro measures (Winn) and expert opinon
surveys (Benston and Krasney) for a type of ex-ante
assessment.
Ex post facto analysis can only provide insight into
the effect of past regulation. There is no guarantee that
the same effects can be expected of proposed rules. The
Committee on Social Consequences of Accounting Information
(AAA, 1978) defined “a priori" problems as
"...those for which solution frameworks or
heuristics already exist. The value of having an
"a priori" policy is to be able to deal
generically with problems which have common
attributes..."(p.34). °
112
Methodologies are needed to provide forms of "a priori™
evaluation of proposed accounting rules other than
individual opinion and visionary forecast
The main objective of this research is therefore to
Provide a new approach which demonstrates that economic
Consequences of accounting policy rulings are
counterintuitive. This will be attempted by the application
of the system dynamics methodology to accounting policy
input analysis.
APPROACHES TO ACCOUNTING POLICY IMPACT ANALYSIS
The AAA (1977) listed a series of methods for monitoring
socio-economic phenomena. ‘Two major categories emerge: (1
opinion gathering, and (2) systematic modeling. The first
approach includes piecemeal examination methods, survey and
interview methods and the delphi techniques. The second
approach includes input- output analysis, archival market
reaction analysis and system dynamics.
None of the opinion-gathering methods is able to-
examine the dynamic consequences of policy changes on the
economy. They do not take. account of the interaction
effects of the different sectors in society. Most often
they consider the potential impacts in isolation.
Among the systematic modeling approaches, input-output
analysis does examine the interrelationships of different
sectors, But it is a static model: Archival market
reaction analysis is an ex post study of aggregate behavior.
It does not identify the impact of particular user groups or
Sectors, System dynamics is a systematic approach to
developing a model. Verbal description and observations of
the system are interpreted in flow charts which portray
levels and flows of elements: information, money, orders,
materials, personnel, and capital equipment
System dynamics offers a holistic approach to
determining the dynamic consequences when the assumptions
within the model interact with one another. Ansoff and
Slevin (1968, p. 384) suggest a series of steps for
constructing and running a simulation and point out a few
distinctive features of the “industrial dynamics approach."
First is its totally quantitative approach; second is its
lack of allowance for subjectivity, and third is its
approach to the issue of model validation. The issue of
validation has been extensively discussed in the literature
as a common weakness of computer simulation studies.
Day (1974) examines the system dynamics methodology and
criticizes the complexity of system dynamics charts and
assumptions, but concludes that
"We have found the basic logic of system
dynamics to be unassailable. People should be
able to disagree over underlying empirical
assumptions without impugning one another's
integrity." (p. 270) '
His study is of interest to this paper as he examined both
Solow's (1965) growth model and Forrester's (1971) world
model.
Prakash and Rappaport (1975) in a recent note in
Business Week, show a series of potential feedback effects
of accounting rules and argue that:
“We suggest that the FASB should enlarge the
scope of its concern and that it create a
full-fledged research division responsible for
conducting inquiry inte the —_ potential
macroeconomic consequences of accounting methods
under consideration. This research staff would
draw up a brief to accompany each exposure draft,
summarizing the technical considerations and
economic consequences involved in each
alternative." (p. 12)
This suggestion for research bears qualification by
Forrester's statement that:
"It is my basic theme that the human mind is
not adapted to interpreting how social systems
behave. Our social system belongs to the class
called multiloop nonlinear feedback systems.”
(1971, p. 58)
The present paper develops a simplified macroeconomic model
in order to identify some of these non-linear loops and
examines the model for potentially counterintuitive impacts.
THE STRUCTURE OF THE MODEL
An Initial Model
Forrester states that:
"The first step in a system study is to
identify clearly the problem to be explored and
questions to be answered. The initial example
113
must be kept simple ... Later we can range more
broadly ... " (1961, Pp. 21).
For this initial model a three sector economy was
devised, without a -foreign sector and disregarding
subsectors. A balance sheet was designed for each of the
three sectors, and each of the accounts of these simplified
balance sheets was considered as a level. Forrester (1968,
p. 4-11) explains the differentiation of levels and flows:
“In financial accounting, for example, a
clear separation is made between the balance sheet
and the profit-and-loss statement. The balance
sheet variables are levels, giving the financial
condition of the business system at one point in
time. The balance~sheet levels show the effect of
accumulating the rates flow over all past time.
The profit-and-loss statement, by contrast, gives
the rates of flow that have existed since the
Previous balance sheet, The profit-and-loss rates
Cause the changes from the previous balance sheet
to the present."
Figure 1 displays the key levels considered in each of —
the main sectors. We shall discuss the model being
considered along with the key feedback loops used for its
development.
Figure 1
Three Sector Economy
Levels Being Considered
BUSINESS HOUSEHOLD
taal Liabilities taal bt
Inventory | Owners Equity Assets Indiv.Wealth
PP & E Securities|
Papers
Receiv,
Debt
Assets Wealth
Generation of Business Activity
The model utilizes two superimposed functions to
represent the basic economic cycle. One macro function
takes an economic level variable as constant and mounts on
it a five-year cycle sinoid. The second function mounts the
sinoid on an economic growth ramp. The basic economic cycle
is used to drive macro variables such as sales from business
to the government and household sectors.
Borrowing, Interest, Saving and Dividend Cycle
This cycle deals with the loan of. funds from the
business sector to the household sector and the payment of
interest on the outstanding balance by the household sector.
Cash flow information is accumulated in the household debt
level and the business papers (notes) receivable level.
Interest being paid is determined by the level of business
Papers receivable and the constant business interest rate.
The other side of this cycle deals with the application of
household funds to savings accounts, corporate bonds and
savings certificates, Interest paid by business to the
household for these funds is calculated in an aggregate
manner. Figure 2 shows the key elements of this cycle.
Figure 2
Borrowing, tneeeeet oeutad and Dividend Cycle
$
Savings a S's
$3
»° Borrowing $
of Papers —
Receivable $ ff
Nm,
N ©
~
St eed
Owner's Dividend
Equity Rate
14
Another way in which funds flow between the business
and household sectors is through equity ownership. Owner's
equity reflects the accumulated business income net of
depreciation and taxes. Dividends are paid as a function of
the owner's equity.
Inventory Cycle
Inventories are recorded as a flow of materials
Inventory flows reflect the sales from business to business
(in the form of property, plant and equipment production
and sales from business to government and household sectors.
Inventory is used up at an average consumption rate based on
sales and utilization. This consumption is also charged to
the income of the corporation. figure 3 shows the key
inventory flows.
Figure 3
Inventory Cycle
ert tt
a“? Wealth
Household
Assets Depreciation
Business
Producti Inventory = - 7 > Governnent
Oana : gt Wealth
Government,
Taventory Assets
Usage
Depreciatidn-
Property,
Plant, &
Equipment
Depreciation
Government Papers Cycle
Government papers (including state and local bonds) are
issued to balance the government's budget. The rate of
government issuance of debt is a time series derived
constant. The fraction of debt issued to the corporate and
household sectors varies from period to period based on
10
historical trends.
The printing of cash is considered separately, and is
shown as increased indebtedness of government to the federal
reserve. Interest is paid on government papers at a rate 1%
lower than the established prime lending rate. A one month
delay is used for the increment of the outstanding
government debt for the purpose of interest payment.
Information flows also update the government debt level,
household held securities level and papers receivable level
by the business sector. Figure 4 reflects these flows.
Figure 4
The Government Paper Cycle
Inigrest — -freray
__ Governmnt” j &
Papers Held
TTousenotd ee lists,
ernment Tovernmen
pe a Cash Hebe
Taxation Cycle
shree types of taxes are considered: (1) direct
(individual) ‘taxes, (2) indirect taxes (sales, FICA, etc.)
and (3) corporate taxes, Direct taxes are paid by the
household sector to government as the result of taxation on
115
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Salaries, dividends, proprietary income and interest. As
these taxes are considered on an aggregate basis, a single
tax rate is used for the aggregate income flows and their
direct tax revenue effect.
The indirect taxes are sales taxes, gas taxés, property
taxes, and other major indirect taxes paid to the
government. This flow is directly connected to the income
level of households in the same manner as the direct tax
rate. In addition to the above taxes, FICA and other social
security payments are also included in this category and
determined by the same income figures, but at a different
rate than the sales taxes. The corresponding outflow in
this cycle is the rate of transfer payments from the
government to the household sector.
Corporations are taxed on their current income flow
levels at a constant tax rate. The level of corporate
income {s drawn from the same rate flow as the owner's
equity accumulation discussed in the borrowing, interest,
saving and dividend cycle. - Figure 5 represents the key
elements of the taxation cycle.
Figure 5
Taxation Cycle
BUSINESS
CASH
HOUSEHOLD
CASH
Stax rate
\
\
i ‘
corporate income
tax rate
Sales, Inventory and Salary Flows
Sales rates are based on a series of simulated
macroeconomic cycle parameters. These parameters are
proportionately divided between sales to the government and
to the household sectors. Sales within the business sector
are ignored. Profits are generated as a fixed percentage of
sales, with different rates for the government and the
household sectors. Inventory rates are the complements of
these profit-income rates. The combined image of all of
these loops can be seen in figure 6.
116
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ever
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9 aansyy
14
MEASUREMENT PROBLEMS
feaningful models are based on perceived logical
relationships and carefully estimated Parameters, These
Phres eaag im a System dynamics model canbe Giviced into
Ehree main classes: 1) initial values of levels, 2) rates
Gf flow and their growth parameters and 3) curve forms and
value of delays,
Level values
ge¥ Measurement problem in this simulation was the
eeceblishment of initial values for levels. once
tprgolished, increments in these levels could /ct monitored
ghrough. a comparision of historical sith model developed
Values, variances could be computed sad Parameters adjusted
This study encountered considerable difficulty in
gathering values for levels, Most of the sources of
Macroeconomic data are gathered on a flow basis while levels
at any point in time are difficult to ascertain,
Appendix 1 lists the developed model as implemented in
the DYNAMO language and explains the defined variables
gorough comments and notes, Initial varees ac levels are
defined as N type equations.
Flow Rates ‘
Flow rates were easier to gather from economic data.
Flows on either a monthly or quarterly basis were available,
Wherever possible, no parameters were assigned, but logical
relationships were used. Constant rates for interest and
inventory depletion were used to determine certain flows.
On the other hand, a curve fitting approach was used where
Re logical relationship existed. 4 Scattergram based on
Ronthly data was developed, a time-series curve fitted, and
Parameters computed based on the regression line, Rates
were scrutinized with considerably more care than levels,
since the dynamic behavior of the system is more affected by
flow rates and their changes than by initial levels.
The basic macroeconomic variable (GNP) had a base value
(ramp function) with a five-year cycle sinoid mounted on it:
GNP#(a4(b*TIME) )~(C#sin(2*PI*TIME/120) )+ (d*NOISE)
where a,b,c and d are constants.
117
15
This variable served as input to two central economic
rates: sales from business to the household and government
sectors. These rates then moved the other basic
time-dependent variables of the cycle. These variables were
developed on a correlational basis to the sales rates or by
logical linkages.
Rates were also dependent on indexes such as: the
interest rate (assumed initially to be fixed), the
government bond interest rate, and the rate of inventory use
{ratio of inventory produced to inventory used up in the
business sector). These indexes, assumed fixed here, could
become time-dependent or variable dependent in more
sophisticated models.
Some of the more common rate equation formats are given
below:
INTGTS.KL = GPHEBU.K x GPINRT
where
INTGTB.KL Interest paid by to business (on
government notes) in period K to L
GPHEAU Level of government papers held by
business at time K
GPINRT Government paper average interest
rate (constant)
PROD. KL = Delay 3 (INVS.JK, DIP)
where
PROD. KL Production of the corporate sector
in the period K to L
DIP Constant length of delay in
production
Delay 3 Third order delay
o
SALAGI.KL = +.(b x Time) + (c x Noise)
where
SALAGI.KL salaries paid by the government
during the period K to L
a,bye regression developed constants
NOISE function providing random numbers
between -1/2 and 1/2
Curve Forms and Delay values
Most rates were defined as ramp functions with noise
added. This implies a constant annual growth with small
random fluctuations. Delays were only inserted as logically
required. Macroeconomic leading and lagging indicators were
used as an indication of potential delays.
Data Used
The model was developed with data from 1965 to 1974
drawn primarily from the Economic Report of the President
(1979), Survey of Current Business (1965-1974), and
Predicasts'’ Basebook. Considerable inconsistencies exist
Between sources of macro data and these were resolved within
the simplified context of a three sector economy.
VALIDATION
one of the key problems of a system dynamics model is
its validation. Ansoff and Slevin (1968) state that
"Industrial dynamics shares with other simulation approaches
some difficult problems of model validation." This study, as
well as the others discussed above relies on predictive
validity measures as well as logical process evaluation.
Model Logic
The internal logic of the model (internal validity) was
designed with care and was intended to be realistic, but the
impact of the simplifications introduced cannot easily be
evaluated. ‘The development of a detailed macro model of the
economy is beyond the scope and intent of this paper. The
external validity of the model should be evaluated based on
model behavior characteristics.
Chart 1 displays a 120 period run of the basic model
without the ramp function. The movements of the driving
macroeconomic variable, GNP, can be compared with those of
levels and flows in the various sectors. In an upsurge of
the economy there is a slow increase in government spending,
which flattens (but does not decrease) in a recession
period. Transfer payments increase at a moderate rate,
corporate incomes decrease, while sales follow the economy
in depression periods, When the ramp function is added, the
same - effects continue to be observed, giving further
evidence of the model's external validity.
118
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Predictive Validity
Changes in levels due to computed flow rates were
examined in light of the historical flows. Some additional
adjustments were made to improve the model's external
validity, but no claim can be made that the model was fully
validated. Figure 7 displays a comparison of figures of
related variables produced by the model for 1975 to 1976
with the actual figures for the period.
Figure 7
predictive WaTidity
YEAR | MODEL { ACTUAL
| PREDICTION! DATA
!
Savings by Household 1976 | 7.0
(monthly flow) 7 ! 7.4
Interest Household to 76 1 2.0
Bus. (monthly flow) 7 | 2.12
Business Sales 75 {e1.1
to Households 76 189.88
|
Corporate Salaries 75 162.75
16 168.75
i
Currency Expansion 75 187.2
(cumulative level) 76 191.3
1 ==
Corporate 75 { 3.03 | 2.8
Dividend 76 | 3.13 | 3.0
i
Borrowing 76 | 1.70 | 1.96
(ave, monthly flow) 77 | 1.75 1 1.96
| 1 —
Business Sales 76 112.40 114.32
to Government 77°) (112.98 116.09
1
Taxation 73 | 4.92 14.t
Corporate 76 | 5.08 15.2
| i
Indirect 76 18.25 114.17
Taxes 77 (119.00 115.63
| Io
A paired t-test comparing model predicted values with
actuals failed to accept the hypothesis chat these two
18
groups had significantly different means at a significance
level of 58.
The next section discusses some of the findings of the
initial model runs. These are to be read as tentative in
natute. This paper emphasizes model development and
considers the theoretical framework for impact analysis.
Future research will be directed to actual evaluation of the
impact of accounting alternatives.
RESULTS AND EXPERIMENTAL METHOD
The basic time interval for integration increments was
0.2 months with one month established as the basic time
period for reporting. Simulation runs lasted between 120
and 240 months. Plots and tables were obtained for the
basic cash, inventory and liabilities of the three sectors.
This section of the paper will present four potential
applications of the system dynamics method to economic
consequence assessment, These are not to be considered as
conclusive but as an illustration of model utilization. If
this purpose is accomplished it will then be up to the
Standard setting bodies to contract for specific research
dealing with potential rulings being considered.
Preliminary Analysis
The most interesting preliminary analyses are based on
the insertion of pulses into the system, ‘These show the
system reaction to surges in specific elements. With the
insertion of such pulses, different harmonic effects can be
perceived. Such an effect could be observed on transfer
Payments and household cash. The latter presented a second
harmonic about one period behind the former, before
seasonality was introduced.
Another interesting and predictable effect is the
increase in government indebtedness due to the fact that
government expenditures take time to be compressed when
revenues go down. On the other hand, these predictable
effects do not seem to immediately explain total changes in
cash levels, This leads to the previously mentioned
perception of counterintuitive behavior, Further analysis
tentatively attributed these effects to delayed feedback
from government salary decreases, and a consequent decrease
in purchasing power by the household sector, which in turn
further affected the business income figure.
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Effect of Depreciation Method
A pulse was introduced in the depreciation of business
assets to represent the effect of passage of the legislation
currently before Congress that would allow considerably
accelerated depreciation. Secondary and tertiary effects
were noted but the change in depreciation pattern did not
affect long term system stability. Ripples were observed in
corporate income, government spending, government
indebtedness, and corporate taxation. These indicate
counterintuitive effects from changes in depreciation rules.
Charts 2 thru 7 represent runs with depreciation pulses.
Restructuring of Debt
In order to represent the effect of the proposed
restructuring of debt regulation, a sudden change in the
level of corporate indebtedness was inserted to represent
the decrease in’ recognized (receivable) loans by banks
Direct effects of this change were observed in the flow of
interest from the household sector as well as in corporate
revenues. Secondary effects entailed changes in the flows
of corporate taxation, government revenues and issuance of
government debt. In addition tertiary effects were observed
upon the household sector. The restructuring of debt,
simulated by a sudden decrease of corporate debt, does not
significantly affect system stability. A more complex model
which separated the financial from the non-financial
subsectors of the corporate area would have been more
appropriate for this type of analysis.
Capitalization of Interest Cost
SFAS No. 34 required the capitalization of interest
costs by business under specific circumstances. This
procedure will postpone the taxation stream by distributing
costs (through depreciation) over the lifetime of the asset
in question. In estimating the magnitude of these effects
they were considered to amount to less than 1% of corporate
income and thus produced insignificant effects in the model.
This {llustrated a situation in which parameter estimation
provided valuable insight into the importance of a ruling.
It also was a case where a much more refined and detailed
model would be necessary for economic consequence analysis.
Inflation Accounting
SFAS No. 33 required a series of changes in financial
Teporting to reflect inflationary conditions. The specific
impact of this ruling would be contingent upon measurement
20
methods adopted and their consequences.
The GNP equation, initially composed of a ramp function
and a sinoid, was changed into a simple sinoid in order to
evaluate a no growth (or inflationary expansion economy). A
more detailed analysis would have separated real growth from
inflationary growth figures not only in the GNP equation
(shown in Appendix 1) but also in the many flow equations.
Examining chart 9, which resulted from.the elimination
of the GNP ramp, it can be concluded that key sales and
salary variables slowly and not proportionately respond to
adjustment for inflation. Income reporting and its
consequent taxation effects would be the main driving forces
reflecting the effects of SFAS no. 33.
CONCLUSIONS
This paper displayed the key features of a simplified
macroeconomic model oriented toward the examination of the
impact of accounting rules. System dynamics, a continuous
simulation methodology, was used for system modeling.
The processes and level changes observed in the model
support Forrester's contention that the behavior of complex
systems is counterintuitive. Such a finding will be of
major concern to the accounting regulatory bodies. Most
present accounting procedural changes or rule statements are
based on accounting theory and the expected effects of these
changes. These expectations are usually based on the
intuition of accounting experts who are by no means economic
experts. Such intuitive judgments are probably not very
accurate. AS a result, the regulatory bodies, especially
the PASB, cannot accurately evaluate the effect or impact of
their rulings by intuitive thinking and extrapolation.
The model presented in this paper permits a tentative
evaluation of the impact of accounting rulings at different
points. In its present structure, very few judgmental and
and no behavioral links were included. Many of these should
later be incorporated to the model for a more accurate
representation of reality, For example, a linkage between
stock market valuation of a stock and its earnings should be
included. Other behavioral links would include the effect
o£ economic climate on stock and commodity valuation, the
effect of elections and other major political events, or the
effect of the monetary variables on investment resource
allocation decisions between the stock market, land and
other alternatives.
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Immediate expansions of this model would hinge on the
impact analysis objectives. The evaluation of the impact of
FASB Statement No. 8 on the translation of foreign assets
would require the inclusion of a foreign sector. Studies
from past history on the fluctuation of earnings due to
relative changes in foreign currency could provide data on
elementary rate fluctuations in the business income stream.
This situation could be carefully monitored at the different
levels of the three sectors and the results compared with
runs that allowed for "reserves" in foreign countries for
currency fluctuations. This comparision might also provide
a benefit for other proposed solution examinations and for
the final ruling decision to made on the tradeoffs between
adequate ("theoretically based reporting" and the
dysfunctional effects of foreign currency fluctuations.
One potential enrichment to the present model would
encompass the development of simulation parameters based not
on historical values as here described, but on inflation
adjusted values and the observation of processes within the
economy related to the different types of reporting. The
comparison of the predictive validity of these two
approaches on certain key elements of the economy would lead
to interesting conclusions on the simulation process and
methodology. Other potential enrichments would provide
further detail in the model to represent flows within
sectors, a more detailed sector balance sheet, the inclusion
of a foreign sector, a breakdown of the corporate sector
into financial and nonfinancial areas, etc.
This paper attempted to evaluate the use of the system
dynamics methodology for economic impact assessment. Four
different rulings were superficially assessed using the
three sector model and there was some evidence that such an
analysis would provide additional insights into economic
consequences. It was also concluded that changes in the
model structure are necessary to represent different rules
and that once these structural changes are made new external
model validation becomes necessary. Once effects are
detected by the use of this methodology it becomes
reasonably easy to logically explain their causes, A
focusing of attention on the feedback effects of accounting
rulings may be the major potential benefit of a system
dynamics methodology.
Concluding, this paper presented a simplified
macroeconomic model for the examination of accounting policy
impact analysis, It argued the need for extensive
examination of the impact of accounting rulings on a
non-intuitive basis, attempted to demonstrate that this
impact is counterintuitive, and finally proposed a series of
studies to examine the impact of actual $B rulings and
Procedures.
22
REFERENCES
American Accounting Association, Report of the
Committee to Monitor Socio-Economic Phenomena, Sarasota,
Florida, 1977.
American Accounting Association, Report of the
Committee on the Social Conse usieae oF of Accounting
Information, Sarasota, Florida, a
Abraham, S. C. The Public Accounting Profession: An
Application of Futures Research methods” iS to Identifying and
Clarifying problems, unpublished Ph.D. Dissertation, UCLA,
1976. ee
Ansoff, H. I. and D. P, Slevin, “An Appreciation of
Industrial Dynamics," Management Science, March, 1968, PP.
383-397.
Buckley, J. W., "The FASB and Impact Analysis,"
Management Accounting, April, 1976, pp.13-17.
Conley, B. C. "Inflation and Interest 'Expense' of the
Federal Government,” paper presented at the Eastern Economic
Association Meeting, April 15, 1977.
Day, R. H., "On System Dynamics," Behavioral - Science,
1974, pp. 260-271. —
Financial Accounting Standards Board, Statement No. 2,
Accounting for Research and Development Costs, October,
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1100
APPENDIX 1
THREE SECTOR ECONOMY SIMULATION - INFLATICN
TREE SECTOR ECONOMY SIMULATION - INFLATICH
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