2. Cost-benefit analysis and accounting data

One valuable source of information for any organization about benefits and costs is its accounting information system (AIS). The AIS is usually designed to provide, at the minimum, sufficient information for compliance purposes. For example, public corporations must file various reports with the Securities and Exchange Commission (SEC) to inform investors and creditors about the companies’ performance, financial position, and risks. Accounting reports come handy for many other transactions such as obtaining a loan from a bank and submitting a tax form to a tax authority.

In addition to compliance, accounting information about benefits and costs is used internally to make better operational and strategic decisions. For example, accounting information is used to make decisions about outsourcing activities, discontinuing operations, processing further products, efficiently using constrained resources, investing in quality control programs, expending advertising channels, changing a product design, decreasing waste, leasing equipment, adapting distribution networks, improving customer support, offering warranties, investing in R&D activities, and so on.

Many organizational decisions can use accounting data, which can be further supplemented with additional information. The reason that supplemental information is needed is because the accounting information system is designed to capture information triggered by actual events that impact organizational performance and position with high probability.

The probability of the anticipated impact must be high, especially in the case of probable benefits. For anticipated losses and costs the threshold is relatively lower but still it requires some events to trigger the recording of the anticipated loss and costs. This conservative nature of accounting record-keeping may not recognize some probable benefits until those benefits become more certain or materialize as a cash flow. For example, organizations cannot recognize an intangible value of fantastic leadership and excellent organizational culture. Intangible assets can be recognized in general when purchased (e.g., buy a patent or copyright, M&A). But, that doesn’t imply that the accounting information system fails to capture intangible value of some benefits that have high uncertainty. If the excellent organizational culture does indeed bring value, the accounting system will capture it as increased or sustained sales revenue on the income statement and cash or other assets (e.g., accounts receivable, deferred revenue) on the balance sheet even though there will be no intangible asset “Excellent Culture.”

The accounting record-keeping system triggered by actual events that happen inherently precludes the record-keeping of events that do not happen. That is why accounting information system can capture outlay costs (i.e., cash flows at some point in time) but not opportunity costs (i.e., lost benefits from the alternative use of resources that doesn’t happen). Hence the need for managers to actively incorporate additional data not captured by the accounting system.

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