Accounting Myopia

Accounting myopia (literally: myopia ("bijziendheid") describes a problem due to the fact that some types of investments that benefit the company from an economic perspective, certainly for longer periods of future value generation, are not activated properly. Think of investing in the brand name and other, often intangible, values​​. These investments are fully and immediately charged to the accounting income for the period charged. The manager is thus tempted to postpone this type of investment.

• Economic Profit is the ultimate measure of value creation but...
• Accounting Profit is a lagging@mbi indicator
• What about stock performance as a proxy for economic profit?

Pro's of accounting measures:

• Relative precise and objective
• Goal congruent
• Controllable
• Understandable
• Inexpensive

Con's of accounting measures:

• The correlation between ECOP and ACOP exists but is rather weak
• Valuation problems
• Cost of working capital (WACC)
• Hindsight oriented

Solutions

• Use ECOP
• Split between short term performance an longer term investment control
• Combine financial results with Pre-action review@mbi
• Improve ACOP
  • Better matching
  • More realistic realization principle
  • Cost of equity capital
  • Problem GAAP]
• Longer term incentive plans
  • Research shows ambiguous results
    • Very expensive, managers are only willing to accept the contract when the reward at the end is very high
    • Apparently higher risk for the manager
• Set of value drivers:
  • Pros and cons off the balanced scorecard
• Reduce pressure for short term profit
• Relative performance measurement
• Subjective performance measurement