The key to competitive success is likely to be the ability to create, leverage, and develop specialised knowledge and intellectual resources. This new reality presents both challenges and opportunities for accounting, a discipline which has traditionally found it difficult to deal with the recognition and measurement issues surrounding intangible assets. This paper makes two contributions to the emerging literature on intellectual capital. Firstly, it offers some preliminary results of a study of the drivers and generators of intellectual capital. Secondly, it posits a theoretical/ methodological approach to intellectual capital based upon Habermas' concept of communicative action, a concept that allows the premium attaching to the human and dynamic elements of organisations to be accentuated.
Drucker’s (1994) claim that knowledge is becoming the
only meaningful economic resource is complemented
by
http://sunsite.informatik.rwth-aachen.de/Publications/CEURWS/Vol-34/ Those charged with the financial management of commercial resources concur. The International Federation of Accountants (1998), for instance, notes that knowledge is the primary competitive factor in business; that it is a non-traditional intangible resource; and that the accumulation, transformation, creation and valuation of this resource lies at the heart of intellectual capital management (IFAC, 1998).
However, industrial era managerial paradigms,
based on the tangible sources of value (land, labour and
financial-capital) and the predict-direct-exploit-control
bureaucratic machine metaphor are proving
increasingly incapable of dealing with the emergent
complexities of visualising, creating and leveraging this
resource. Furthermore, little is known about how these
intellectual resources, structures, institutions, processes
or dynamics actually develop, or how they should be
managed, utilised, valued or accounted for. A concept
such as intellectual capital, even with the accumulated
tools of the philosophy of consciousness and the recent
move to the philosophy of language, cannot be
precisely defined. This should not, however, prevent us
from using it at a time when the intangible is rapidly
gaining economic and social supremacy over the
tangible
This paper proceeds in six sections as follows: Section 1 briefly summarises the emerging literature on Intellectual Capital. Section 2 identifies a number of the issues of relevance to financial and management accounting raised by the emergence of an intangible asset such as ‘intellectual capital’ as a primary driver of corporate wealth. Section 3 introduces a conceptual framework within which this dynamic can be imagined. Adopting the Habermasian (1984) notion of ‘communicative action’, an action-theory allowing for the exploration of the role and nature of relationships amongst employees as the main drivers and repositories of corporate wealth, this section challenges a literature which already leans heavily towards systems-theoretic approaches which facilitate the colonisation of this space by the owners of capital. Section 4 outlines a very preliminary analysis of data collected in a survey of CEOs of thirty indigenous, knowledge-intensive firms operating in the IT sector in Ireland, and presents some of the accounting issues which this raises. Section 5 discusses some of these issues in the context of Habermas’ theory of communicative action. Section 6 offers some indications of future research possibilities.
In the absence of any accounting-specific methods to
recognise and measure intellectual capital, various
templates have been developed by others to facilitate its
identification and management. Although there is
substantial variation as to how each dimension is
conceptualised, theorised or measured, and a glaring
dearth of good empirical studies, a broad consensus is
now emerging in which most intellectual capital models
assume a three way distinction between People,
External, and Internal dimensions
Common measures or indicators of these dimensions have been identified and developed Examples are listed in Table 2. Significantly, several of these are already produced by accounting-based internal management and information systems (IFAC, 1998; Roslender, 2000). per employee
repeat orders
frequency
support staff
education
experience satisfaction
with agencies organisation per customer
These approaches are supplemented by various methods developed to enable inter-firm comparison. Among the more common approaches facilitating this relative assessment of the existence and valuation of intellectual capital are: 1. Market-to-book ratios: the simplest of the calculations, this takes the difference between the book value of a company as represented by its balance sheet and the market value, whether from stock exchange or internal market to be equal to the level of intellectual capital in the business; 2. Tobin’s ‘q’: ‘q’ is the ratio of market value to replacement cost of a company’s assets and can be used as a comparative base between firms; 3. Calculated Intangible Value (CIV): using industry norms to establish rates of return for tangible assets, this measure calculates the level of intellectual capital by attributing to it any return in excess of the industry norm. 4. ‘Colorised’ reporting: proposed by SEC commissioner Steven Wallman, this approach places the emphasis on additional narrative reports (the ‘colour’) which supplement the more traditional (the ‘black and white’) financial statements, with information which helps to identify and classify intellectual capital in a relative context.
While all of these can be faulted on a number of grounds, their primary usefulness is that they provide a common measure allowing firm performance to be benchmarked, thus enabling comparative measures of intellectual capital to be established (Dzinkowski, 2000).
Accounting has traditionally focused its attention on
capturing and representing items which can be fully
objectified. Underpinned by a system of historical cost
accounting which ascribes ‘value’ to transactions
involving tangible entities, generally accepted
accounting practices (GAAP) have been developed
which reflect accounting’s fundamental stewardship
role, that is, of accounting for and informing company
management and its various stakeholders of the
existence and progress of its resources, activities and
investments
Reflecting this historical emphasis upon its
stewardship role in relation to tangible items,
accounting has found it much more difficult to deal with
items which its limited conceptual framework neither
recognises nor values. In fact, since such intangible
resources can never be fully objectified, accounting’s
cognitivist paradigm is incapable of embracing them
within its worldview. One of the principal catalysts in
causing the efficacy of current financial reporting and
management accounting concepts and procedures to be
revisited has been the gradual realisation that intangible
assets can no longer be dismissed as the incidental and
troublesome offspring of activities undertaken by
relatively few, albeit large, entities. The dawning
awareness that intellectual capital in its various guises
now forms a major part of the resource base of not only
individual firms, but also entire industries, has
challenged accounting regulators to review the manner
in which these are treated. In an environment in which
international trade in the knowledge sector is growing
five times faster than in natural resource-intensive
industries, where the costs of information long ago
surpassed the costs of equity
In recent years some attempts have been made
by accounting regulators to redress this deficiency.
Accounting standard setters, for example, have begun to
review the conceptual scaffolding that has seemed to
preclude the discipline from addressing issues of
relevance in the modern commercial milieu.
Hermannson (1964) and Brummet et al. (1968) were
seminal figures in the attempt to advance the
recognition and measurement of human resource costs
under the term Human Resource Accounting
(Flamholtz, 1985). The accounting profession has,
however, largely ignored HRA, citing the traditional
objections put forward by those aware of the challenges
posed by accounting for such resources
The traditional accounting model is one which views an
individual being as capable of gaining knowledge about
a contingent environment and using this knowledge
effectively by intelligently adapting to and manipulating
that environment
We claim that a more suitable point of departure
for exploring this emergent dynamic, with implications
for people management and accounting professionals, is
the set of symmetric and reciprocal relations
presupposed in Jürgen Habermas’
Roos and his colleagues (1997) note that most strategic
contributions on knowledge focus on two main issues;
the way knowledge is created and the way it is
leveraged into value, although there is no definitive
boundary between the two. As customer relations in
knowledge-intensive businesses are no longer seen as
one-way driven, but, rather, partnerships in which
solutions are co-created and knowledge flows both
ways
In this worldview, the nexus of intellectual
capital creation may be viewed as residing in the set of
interactional social relations that exist between people
whose ‘value’ is greater than the sum of their individual
parts. Moving beyond traditional concepts of human
capital (Becker, 1964), which refer to an individual’s
acquired knowledge, skills and abilities, intellectual
capital refers to the knowledge and knowing capability
of a social collectivity
One of the persistent obstacles confronting managers and, indeed, accountants as they struggle to develop measurement and management techniques appropriate to the dynamics of the knowledge economy is the lack of empirical data. Thus, while considerable work has been done by individual companies such as Skandia and Dow Chemicals to develop indicators of intellectual capital, little is known about the changing internal dynamics within firms and, indeed, economies, that parallel the knowledge era. A joint research programme undertaken by the University of Limerick, the Irish Management Institute and the University of Maryland involving the collection of detailed and extensive perceptual data from Chief Executive Officers, Top Management Team members and Core Employees in indigenous Irish firms operating in the knowledge economy is, however, yielding considerable insights into these dynamics. Supplemented by internal and external data on the financial performance of these firms this research may provide some early indicators of the extent of the challenges posed for managers, accountants and national planners by the ‘new economy’.1 More specifically the perceptual data derived to date from interviews with CEOs of thirty of these indigenous Irish firms provides empirical evidence of the significance of intellectual capital in terms of company value, the principal drivers of that value, and the extent of the challenge facing accountancy as it attempts to grapple with the recognition and measurement issues associated with intellectual capital.
The Irish software/telecoms sector provides an ideal research framework for any such investigation. In recent years it has established itself as the largest software exporter in the world and been one of the primary engines of growth in an economy that has experienced real growth of 37% in 5 years, a rate unparalleled in the developed world. It also provides a ‘new economy’ environment in which the scope to develop new managerial practices is greater than in traditional industries. Within this sector indigenous Irish firms play an increasingly significant role, employing over 20,000 people in more than 900 firms (OECD, 1999).
As one part of the interview process CEOs were asked to provide perceptual data as to the extent of intellectual capital as a source of corporate wealth. This involved indicating the percentage of company value deemed to derive from ‘intellectual capital’. In line with existing typologies, intellectual capital was presented as consisting of people, internal structure and external structure and CEOs were also asked to indicate the degree to which the drivers of this wealth can be traced to these factors by distributing 100 points between them. Finally they were asked to estimate any increase or decrease in company value over the course of the preceding twelve months. Table 3 provides a summary of this feedback.
The most striking finding is that Chief Executive Officers in the fastest growing sector of the fastest growing economy in Europe believe that, on average, almost two-thirds of their company value is attributable to intellectual capital. This crystallises the extent of the challenge for accounting in that currently 1 The data set developed here forms part of the joint Irish Management Institute-University of Limerick research programme on knowledge-intensive Irish companies. A collaborative arrangement is in place with the University of Maryland at College Park in the USA. This programme is directed by IMI-UL Professor Patrick Flood and Tony Dromgoole of the IMI. this corporate value not only commonly remains off the balance sheet, but is absent from internal management reporting processes intended to facilitate decisionmaking. It is imperative, therefore, if it is to retain its traditional information supplying role, that accounting develops new internal and external measurement concepts and reporting methodologies that recognise the central role of knowledge as a source of wealth. These will need to be supplemented by new financial management techniques that incorporate information resources and knowledge into investment appraisal techniques. This can only be achieved initially by focusing on relative, indicative disclosures rather than on the development of objective recognition criteria and measurement techniques. Such an approach allows the possibility of building upon existing techniques such as those management accounting approaches that already recognise quality and strategic management issues or reporting practices which recognise the usefulness of ‘softer’ disclosures in narrative form (Roslender, 2000).
The interviews are also significant in
confirming that the greater part of this intellectual
capital can be traced to the people element in these
businesses. CEOs perceive that almost fifty per cent of
this intangible value links directly to the people
employed in these knowledge-intensive firms. This
challenges the traditional accounting model which
classifies labour as an expense. The knowledge
economy views employees as assets whose primary
function is to generate revenue by converting
knowledge into a marketable form. The extent to which
people are perceived as assets rather than costs suggests
that one way in which intellectual capital may be better
accommodated is by revisiting the whole concept of
Human Asset Accounting and developing templates and
new conceptual approaches which will result in the
recognition of employees as the principal asset of a
business. It should also lead to the development of new
tools to better assist in the management of, and
investment in, people
This links to another related consequence of the new dynamics of the knowledge economy – the changes being induced in corporate governance models. The existing corporate model strongly favours the providers of financial capital. However, in an environment in which the primary resource is seen as knowledge embedded in people, together with their relationships both to one another and to knowledge and ways of knowing, then the existing governance model will be challenged to embrace a stakeholder approach which recognises the claims of employees to a share of ownership reflecting the fact that they provide the primary value creating resource. Nor is this likely to be satisfied by stock option schemes which are predicated upon notions of reward. A governance model which has traditionally linked ownership to provision of capital may be forced to recognise the consequences of this paradigm in an economy in which intellectual capital is provided by other than financial capitalists. It is also likely that as part of this process the attempts of financial capitalists to capture and establish ownership by means of patents or its physical expression in the form of recipes and manuals will be resisted by employees. The nature of relationships internally will also be affected with power correlating more closely to knowledge and knowledge networks than to hierarchy within a traditional organisation structure.
Furthermore, in an economy in which the importance of teams, knowledge flows, processes and collegiality are commonly seen as facilitators of value creation, the traditional predict-direct-exploit-reward paradigm which underpins the agency view of firm organisation may be increasingly challenged by models which emphasise notions of trust, empowerment, alliance and transformation. These will require the development of internal management techniques which recognise and encourage the accommodation of these concepts as well as reporting methodologies which distinguish between entities in which these traits are increasing and those in which they are decreasing. These techniques will also need to recognise the often chaotic and intuitive process of creativity and ‘knowing’.
The challenge for accounting therefore becomes one of a fundamentally ontological nature: continue with and modify a positivist model which has traditionally had difficulty with either recognising or measuring assets which cannot be fully objectified, or contemplate a new model in which the insights provided by Habermasian theory, or others, could inform the nature of the new paradigm.
In fact, there has been a willingness on the part
of some accounting academics to consider the relevance
of Habermas to managerial accounting practices and
financial statements that are proving increasingly
incapable of meeting the requirements of their principal
users
However, the real significance of Habermas’
notion of communicative action lies in the fact that at a
time when accounting is being forced by commercial
realities to reconsider its ontological and
epistemological framework, it offers a theoretical,
substantive and real platform on which a paradigm
shift, as called for by
As confirmed by this research, by creating competitive advantage intangible assets such as intellectual capital are playing an increasingly important role in the wealthcreating dynamic of the knowledge economy. If it is to be properly managed, however, information systems appropriate to intangible resources and to the needs of an increasing range of users and stakeholders will need to be satisfied. Accounting has traditionally been the principal supplier of such information, gathering and presenting it in a manner such as to allow timely and informed decision-making by management and stakeholders. But accounting’s capacity to continue to function as a primary information provider has been compromised by its inability to respond more rapidly to the demands of a new economy in which intangible resources have emerged as the principal catalysts for growth, with consequent radical changes in organisational structure and knowledge flows.
The information revolution, therefore, offers a number of challenges for accounting, and this research project is being extended to investigate ways in which existing accounting methodologies and paradigms are being adapted by firms operating in this new economy. Significantly, these challenges may be best met by those who learn to apply traditional collection, valuation, reporting and auditing skills in developing new ways of facilitating the creation, integration and management of knowledge in a transparent manner. This will involve the development of new accounting concepts and approaches which not only identify, evaluate and classify, but which are sensitive to the novel stakeholding and knowledge-creating dynamics of the new economy. 17-6
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