External v. Internal Measurements of IC

1) External Measurements of IC

•  Measure the value of IC in financial terms at the organization level;
•  Describe the company so that it may be assessed by stakeholders, customers, and creditors;
•  Describe company changes, flows, and risk;
•  Assess how effectively managers utilize IC.

2) Internal Measurements of IC

•  Entail component-by-component evaluations;
•  Enable management to monitor company progress and to take corrective action where and when needed;
•  Emphasize flows, trends, and changes;
•  Should be mutually consistent; that is, they must be aligned to reflect common purposes and directions for the company as a whole;
•  Have different relevance and usefulness at different levels in the company.

Accounting v. Economic Information

Accounting information is collected and maintained by all companies, as per SEC and IRS requirements.   Accounting terms and procedures are carefully defined by GAAP so as to be uniformly applied, and thus uniformly interpreted across companies.   Furthermore, companies may strategically choose their methods so as to achieve a given accounting goal, such as the minimization of tax burdens.   Thus, a given set of company needs and/or information will not necessarily yield the same accounting results.  

Economic information is not required to be reported by companies, and so it may or may not be collected and/or maintained by companies.   Economic information is much more conceptual, where accounting tends to be literal.   As a result, economic information is much less conducive to being manipulated than is accounting information.   However, its lack of standardization tends to make economic data more difficult to analyze.

The various characteristics of accounting and economic data thus yield tradeoffs when being used in analysis:

•  Standardization :   Accounting information is relatively standardized across companies, to the extent that it complies with GAAP terms and procedures.   Economic information, on the other hand, tends to be much more idiosyncratic across companies.

•  Accessibility :   Since the SEC and/or IRS require both public and private companies to report their financial information, these data tend to be easily accessible.   To the extent that economic information may be maintained by the company, they tend to be scattered throughout departments, and are thus much less accessible than accounting information.

•  Level of detail :   Accounting data tend to be summarized and aggregated on financial statements.   When available, economic information tends to be maintained at a disaggregated level.   Economic information is thus generally more conducive to detailed analysis.

•  Accuracy :   While accounting information is GAAP-compliant, it may have little correlation with economic information.   However, it is economic information upon which companies should be acting to manage and optimize company value.   Economic information is thus generally more accurate than accounting data for purposes of IC management analyses.