The Role of Accounting in the Twenty-First Century Firm

Accounting and Business Research, Vol. 45, No. 4, pp. 1-25, 2015

Simon Business School Working Paper No. FR 15-13

Posted: 9 May 2015

See all articles by Jerold L. Zimmerman

Jerold L. Zimmerman

University of Rochester - Simon Business School

Date Written: May 8, 2015

Abstract

I explore the evolving role of accounting information in allocating capital. Accounting arose to control conflicts of interest in organizations (stewardship role). The industrial revolution spawned capital-intensive firms and public capital markets with dispersed shareholders to finance these firms. The regulation of these public capital markets shifted the role of accounting toward providing investors information for making informed investment decisions (valuation role). With the advent of the semiconductor and global competition, emerging and public firms today differ from their predecessors in fundamental ways. Exploiting the information technologies created by the semiconductor, twenty-first century firms are now more knowledge based, have more intangible assets, are more reliant on their employees’ human capital, confront increased competition, and face diverse conflicts of interests and hence different challenges accessing capital than their forerunners. Responding to the demands of twenty-first century firms, private-equity (PE) markets provide a bundled service – capital and governance. To supply this bundle, PE firms require accounting information to control the conflicts of interest both within the PE firm (between the general and limited partners) and within their investees. Controlling these conflicts shifts the role of accounting back toward its original stewardship roots. The valuation role remains important, but there is little to value unless the conflicts of interest are first mitigated.

Keywords: Knowledge-based firms, stewardship, efficient contracting, creative destruction, accounting standard setting, rules-based accounting standards, private equity

JEL Classification: D23, G23, G32, L14, L20, M20, M41, M54, N20, N80, O17, O30

Suggested Citation

Zimmerman, Jerold L., The Role of Accounting in the Twenty-First Century Firm (May 8, 2015). Accounting and Business Research, Vol. 45, No. 4, pp. 1-25, 2015, Simon Business School Working Paper No. FR 15-13, Available at SSRN: https://ssrn.com/abstract=2604142

Jerold L. Zimmerman (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States
585-275-3397 (Phone)
585-442-6323 (Fax)

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