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The effects of accounting

knowledge on the omission of
value added information in
wealth measurement and
distribution decisions

The effects of
accounting
knowledge
15

Ronald D. Picur
University of Illinois at Chicago, Chicago, Illinois, USA
Abstract
Purpose This study aims to examine whether accounting knowledge is associated with a decision
makers tendency to ignore value added information in wealth measurement and distribution
decisions.
Design/methodology/approach A between-subjects laboratory experiment was employed.
Subjects prepared accounting reports that measured and distributed an entitys wealth based upon
given accounting data. Accounting knowledge was measured as: a discrete variable by classifying
subjects into high-, low- and no-accounting knowledge groups, and a continuous variable by
classifying subjects on the number of accounting courses completed.
Findings Findings provide empirical evidence that high levels of accounting knowledge interferes
with a decision makers ability to incorporate value added information (versus accounting profit) in
wealth measurement and distribution decisions.
Research limitations/implications This experiment used subjects from the USA where the
production and disclosure of a value added report is not mandated. The results should be tested in a
country where the statement of value added is routinely produced, disclosed and audited.
Practical implications This study shows the dysfunctional effect of accounting knowledge
which appears to hinder performance in wealth measurement and distribution decisions.
Originality/value This is the first attempt to explain why decision makers may ignore value
added information in wealth measurement tasks and distribution decisions by focusing on the role of
knowledge structures.
Keywords Value added, Knowledge mapping, Accounting, Wealth
Paper type Research paper

1. Introduction
Because shareholders are considered the ultimate owners of the firm, wealth
measurement has consisted of various ways of income measurement that include
schemes of earnings management and/or income smoothing. If the corporation is
instead perceived as an alliance of a concerned team that includes shareholders,
bondholders, employees, and the government, then the measurement of wealth is
reduced to the determination of the value added information that is ultimately
distributed as dividends to the shareholders, interest to bondholders, wages to
employees, taxes to government, and undistributed value added as retained earnings
( Burchell et al., 1985; Meek and Gray, 1988; Morley, 1979).
While accounting practice has focused on shareholders wealth and changes in
wealth with the resulting measurement and distribution of profit, empirical research
does not report any overwhelming use of value added information by decision makers.
The belief is that decision makers tend to ignore or underestimate value added
information (Riahi-Belkaoui, 1991; 1996; 1999). The omission of value added

Review of Accounting and Finance

Vol. 6 No. 1, 2007
pp. 15-23
# Emerald Group Publishing Limited
1475-7702
DOI 10.1108/14757700710725430

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information in wealth measurement and distribution affects the decision making

process by associating wealth with profit rather than with the total value added
resulting from the activities of the firm.
The reasons behind the omission of value added information in wealth
measurement activities and distribution decisions are either ignored or misunderstood.
Accordingly, it is the objective of this study to develop and test predictions about the
tendency of decision makers to omit value added information out of their wealth
measurement and distribution functions, and, in the end, help decision makers improve
the quality of their decision. This study uses a theoretical framework of cognitive
processing to examine the effects of accounting knowledge on the omission of value
added information in wealth measurement and distribution ( De Nisi et al., 1984;
Feldman, 1981; Holland et al., 1986).
The cognitive processing literature suggests that people rely on knowledge
structures, stored in memory, to guide their decision ( Riahi-Belkaoui, 1990). The higher
the knowledge in a given area, the higher is the likelihood of recalling a familiar
knowledge structure considered suitable for a given decision context. Because the
accounting knowledge structures stored in memory do not emphasize the use, or the
relevance, of value added information, it is possible to hypothesize that decision
makers with high-accounting knowledge will have a greater tendency to ignore value
added information in wealth measurement tasks than decision makers with low- or noaccounting knowledge. The former group of decision makers will recall accounting
knowledge structures that do not incorporate value added information.
In this study, the impact of accounting knowledge on the use of value added
information in wealth measurement and distribution decisions was examined in a
between-subjects laboratory experiment. Subjects in the experiment assumed the role
of a preparer of accounting reports asked by a superior to measure and distribute the
wealth of an entity on the basis of a given set of accounting data. Accounting
knowledge was measured as: (a) a discrete variable by classifying subjects into high-,
low- and no-accounting knowledge groups, based upon the program of business study
in which the subjects were enrolled, and (b) a continuous variable by classifying the
subjects on the basis of the number of accounting courses they have completed. The
effect of analytical ability on income measurement and distribution performance was
also controlled.
The results of the experiment showed that high-accounting knowledge interferes
with a decision makers ability to rely on value added information rather than profit as
a measure of wealth. In particular, the subjects ignorance of value added information
in wealth measurement tasks and distribution decisions increased significantly with
increases in the subjects accounting knowledge. Validity tests rule out differential
knowledge about value added reporting as a potential explanation of their average
tendencies not to rely on value added information in wealth measurement and
distribution decisions.
This study presents the first formal attempt to provide an explanation for why
decision makers may ignore value added information in wealth measurement tasks
and distribution decisions by focusing on the role of knowledge structures. Where
knowledge structures do not include information on the role of value added in wealth
measurement and distribution, the result is an ignorance and/or avoidance of the
concept and a fixation on income measurement as the only concept of wealth
measurement and distribution. This result was obtained even after controlling for
analytical ability as a potential explanation.

This study also adds to prior studies that focused on the dysfunctional effect of
knowledge of a subject matter by examining specific conditions where high-accounting
knowledge may hinder performance (Vera-Munoz, 1998; Libby and Luft, 1993).
The findings of this study suggest that the benefits of high-knowledge or experience
may be hampered by the incongruence between the knowledge structure stored in
memory and the decision problem faced by the decision maker.
2. Theoretical considerations
2.1 Use of value added information in wealth measurement
Value added is the economic measure of wealth. Economists rely on value added for the
wealth of the measurement of a nation. However the accounting profession relies on the
income concept for the measurement of wealth. In effect, generally accepted accounting
principles (GAAP) are primarily used in the case of the income statement for the
measurement of the income of a period as an expression of the wealth generated for
that period. Alternative uses of information used for income measurement can be
easily used to construct value added statements containing the net value added or the
gross value added generated by the activities of the firm in a given period.
Because value added reports are not mandated in the USA, the reconstruction of
value added information from the information used to determine income is not
provided for either external disclosure or internal uses. While optimal wealth
measurement incorporates value added information, externally reported financial
accounting information does not include it. Empirical research on why decision makers
may tend to ignore value added information in wealth measurement tasks when they
are not explicitly provided is non-existent. The current study starts this research by
examining whether differential knowledge of GAAP is the main cause for the
ignorance and/or avoidance of value added information in wealth measurement and
distribution tasks. As discussed below, the knowledge structures created by the mental
storage of GAAP-based information may explain the role of accounting knowledge in
wealth measurement that includes value added information.
2.2 The role of accounting knowledge structures in the use of value added information
The essence of cognitive relativism in accounting is the presence of a cognitive process
that is assumed to guide the judgment/decision process. The cognitive processing
models show that judgments and decisions made about accounting phenomena are the
products of a set of social cognitive operations that include the observation of
information on accounting phenomena and the formulation of schemata or knowledge
structures that are stored in memory and later retrieved to allow the formulation of
judgments and/or decisions when needed ( Libby, 1985; 1992; Libby and Frederick,
1990; Libby and Tan, 1992). Because cognition is highly knowledge- and contextdependent, a specific context will induce the recall of knowledge structure that is
expected to be relevant to the context. Because most formal accounting training focuses
on GAAP, the end result is that the knowledge structures stored and recalled will not
include value added based knowledge for wealth measurement and distribution.
The same phenomenon of a lack of fit between the knowledge structures recalled
from memory and the given problem solving structure has been observed in a chess
context (Chase and Simon, 1973), a tax context (Marchant et al., 1991), and an
opportunity cost context (Vera-Munoz, 1998). In all these contexts, the studies show
evidence of the dysfunctional effects resulting from the lack of fit between the
knowledge structures recalled from memory and the decision situation examined.

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What may be concluded from the above studies is a similar situation for value
added information in wealth measurement tasks and accounting knowledge. That is,
decision makers with high-accounting knowledge who are faced with a wealth
measurement task may be more inclined to recall GAAP-based knowledge structures
that fail to incorporate value added information. Accordingly the following hypothesis
is proposed:
H1. The number of value added information cues ignored in a wealth measurement
task will be greater for decision makers with high-accounting knowledge than
for decision makers with low- or no-accounting knowledge.
3. Research design
3.1 Subjects
Three groups of subjects were asked to participate in a wealth measurement and
distribution task. The three groups differed in the level of accounting knowledge
possessed. The level of accounting knowledge was measured both as a discrete
variable by classifying subjects into high-, low-, and no-accounting knowledge groups
based on the program of business study in which the participants were enrolled and
the number of accounting courses taken.
A total of 180 students from the graduate and undergraduate accounting programs
of a Midwestern university participated in the experiment. The subjects received a flat
compensation payment of $5 plus a performance-contingent bonus, paid after the
experiment was conducted. The bonus was based on a composite score that includes
the number of times value added information was used by the subject in their wealth
measurement tasks, plus their scores on an analytical ability test. Participants whose
scores were in the top quartile received a bonus of $3, the second quartile received $2,
and the third quartile received $1. The bottom quartile did not receive a bonus.
3.2 Case materials and procedures
An experiment phase and a post-experiment phase characterized the study. In the
experiment phase, the subjects were provided with the instructions, assignment, and
data memorandum and a response memorandum. In the post-experiment phase, the
subjects were provided with a reaction questionnaire, a combined test of analytical
ability and value added knowledge, as well as a background questionnaire. In the
response memorandum, the subjects were provided with revenues and expenses data
for a fictional company for a given year and were instructed to: (a) compute the wealth
generated by the firm for the given year based on the data provided, and (b) to indicate
how that wealth was distributed. The case materials were calibrated in a two-stage
pilot test. In the first stage, three accounting professors evaluated the materials and
suggested changes that were later incorporated in a revised version. In the second
stage, three graduate students completed the tasks required and provided the
comments that were also included in the materials presented to the subjects.
3.3 Independent and dependent variables
The three knowledge groups formed included a high-accounting knowledge group, a
low-accounting knowledge group, and a no-accounting knowledge group. The subjects
in the high-accounting knowledge group were: (a) enrolled in the Master of Science in
Accounting program and (b) had completed more than the minimum six accounting
background courses required before being admitted to the program. The subjects in the

low-accounting knowledge group were: (a) enrolled in the undergraduate accounting

group and (b) were in the first week of taking the second required accounting course,
giving them a maximum of one accounting course taken. The no-accounting knowledge
subjects were: (a) enrolled in the undergraduate business program and (b) were in the
first week of taking the first required financial accounting course, meaning that no prior
accounting courses had been taken.
Value added information can be defined either by: (a) the Subtractive method, as sales
minus bought-in materials and services, or (b) the Additive method, as wages
interest depreciation dividends taxes retained earnings. Therefore there are two
value added information options that can be provided and used by the subjects: a first
one when the subjects used the Subtractive method for wealth measurement and a
second one when they used the Additive method for wealth distribution.
The information provided to the subjects included revenues and expenses that can
be used for either method. The subjects were instructed to compute wealth and indicate
how it was distributed. The expectation is that subjects in the no- and low-accounting
knowledge groups will intuitively think of the situation in terms of value added
measurement and distribution. Subjects in the high-accounting knowledge are expected
to think of the situation in terms of profit measurement and dividend distribution.
The key feature of the design is the presentation of sufficient information on both
revenues and expenses for a given year to permit either a profit based or a value added
based wealth measurement and distribution. The memorandum is silent on both profit
and value added as accounting concepts of wealth. This omission allows a test of
whether the subjects in the zero- and low-accounting knowledge intuitively rely on
value added as a measurement of wealth before being socialized differently by a
heavier exposure to GAAP. The wealth measurement and distribution variables were
coded by two trained graduate research assistants, who were completing their last
semester in the Masters program. They were adequately compensated and trained
with facsimile wealth measurement and distribution cases. There were no significant
differences in the results provided by the two coders.
4. Results
4.1 Validity tests
Validity tests focused on task difficulty and familiarity, value added reporting knowledge
and analytical ability. To test the assumption of similar perceptions of task difficulty,
subjects were asked to evaluate the task on a ten-point scale ranging from not difficult
(1) to very difficult (10). The mean scale for high-(5.22), low-(5.85), and no-accounting
(5.81) knowledge subjects did not differ significantly (F 0.062; p 0.730).
To test the assumption of similar familiarity with the tasks, subjects were asked if
they have encountered analogous wealth measurement and distribution situations
within the last two years that help them perform the tasks on a ten-point scale ranging
from nothing analogous (1) to completely analogous (10). The mean score for
high-(4.38), low-(4.21), and no-accounting (3.44) knowledge subjects did not differ
significantly (F 1.275; p 0.346).
To test the assumption of constant knowledge of value added reporting, three
questions were provided. All the students in the three groups provided answers
indicative of complete ignorance of value added reporting. The result is not surprising
as value added reporting in the USA is neither taught nor used in practice.
To test the assumption of similar analytical ability, the subjects were given the same
eight questions indicative of analytical ability selected from prior Graduate Record

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Examination Board (1990) and used by Vera-Munoz (1998). Analytical ability is

composed of analytical reasoning and logical reasoning. Analytical ability is the ability
to analyze a given structure of arbitrary relationships and to deduce new information
from that structure. Logical reasoning is the ability to analyze and critique
argumentation by understanding and assessing relationships among arguments or
parts of an argument. The mean scores for high-(7.89), low-(7.32), and no-accounting
(7.23) knowledge subjects did not differ significantly.
4.2 Tests of accounting knowledge
Descriptive statistics and planned comparison tests for the average number of times
value added information was omitted by an accounting knowledge group are
presented in Tables I-III. The descriptive statistics for the average number of times
value added information was omitted by the subjects are shown in Table I. It shows
that the overall mean number of omissions of value added information by the subjects
was 0.785. The mean number of omissions was higher for subjects with highaccounting knowledge than for subjects with low-accounting knowledge (0.937 vs.
0.858 respectively) and no-accounting knowledge (0.937 vs. 0.560 respectively).
The total number and percentage of subjects who omitted value added information
in both wealth measurement and wealth distribution is presented in Table II. It shows
two important results. First, the percentage of subjects who omitted value added
information is higher for high-knowledge and low-knowledge groups than for noaccounting knowledge group. Second, it also shows that the number of omissions for
the three groups is smaller for wealth distribution than for wealth measurement.

Accounting knowledge
Table I.
Descriptive statistics
(Standard deviation in
parenthesis; the
maximum possible
number of value added
information omission
was two, and the
minimum was zero)a

High
Low
No
Overall

0.937,
0.858,
0.560,
0.785,

n = 64b
n = 148
n = 148
n = 360

Notes: aResults of the statistical analysis that control for analytical ability are qualitatively similar
to those that do not control for analytical ability. Thus, for presentation purposes, the means
reported here are the raw (observed) means (i.e. not adjusted for analytical ability); bn = number of
subjects in a group
two decisions (one on wealth measurement and one on wealth distribution)

Value added information

Accounting knowledge

Value added measurement

High
Low
No
High
Low
No

Value added distribution

Table II.
Total number
(percentage) of value
added information cues
omitted, by accounting
knowledgea

Average value added omissions

Data
30
63
43
28
63
23

(93.7)
(85.1)
(58.1)
(87.5)
(85.1)
(31.08)

Notes: aEntries are number (and percentage) of subjects omitting the value added information.
The percentages are the ratio of the number of subjects omitting the value added information
over the total number of subjects in each category

The results of the planned comparison for purpose of testing H1 after controlling for
analytical ability are shown in Table III. H1 predicts that high-accounting knowledge
decision makers are more likely to ignore value added information in wealth
measurement and distribution calculations than either low-accounting knowledge or
no-accounting knowledge decision makers. The planned comparison for testing H1
shows that, as predicted, the effect of accounting knowledge after controlling for
analytical ability is positive and significant (F 71.61; p 0.00001). This result
indicates that on average, the number of omissions of value added information is
higher for subjects with high-and/or low-accounting knowledge than for subjects with
no-accounting knowledge.
To test the effects of accounting knowledge on the tendencies to ignore value added
information, the following regression analysis was conducted:
Y i
0
1 AKi
2 AAi
3 PEi "i

The effects of
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where Yi is the number of omissions of value added information by subject i, AKi is

accounting knowledge measured by the number of accounting courses reported by
subject i, AAi is the analytical ability, and PEi is the number of months of practical
experience of accounting of subject i.
Table IV shows that regression equation (1) is significant (F statistic 26.355;
p 0.0001) and explains 33.21 per cent of the variation in the number of value added
information omitted. The significant and positive coefficient for
1 indicates that the
effects of accounting knowledge were, as predicted, significant (t 1.994; p 0.040).
It shows more omissions of value added information by those subjects with greater
accounting knowledge (as measured by the number of accounting courses completed).
As expected, the negative and significant coefficient for
2 indicates that the value
added information omissions increase with analytical ability increase (t 5.741;
p 0.0001). Finally, the practical experience in accounting, as another surrogate of
accounting knowledge, indicates a positive and significant coefficient (
3). It shows
that the subjects with greater practical experience in accounting omits more value
added information (t 2.429; p 0.017).
Groups

Mean

Standard deviation

High-accounting knowledge
Low-accounting knowledge
No-accounting knowledge

1.812
1.698
0.888

0.470
0.544
0.358

Table III.

Notes: F statistic 71.61; p 0.00001

Variable

Expected sign

Coefficient

t-statistic

Probability (one-tailed)

Intercept
AK
AA
PE

(+)
()
(+)

3.486
0.035
0.990
0.004

8.557
1.994
5.741
2.429

0.0001
0.0401
0.0001
0.0172

Notes: Equation 1; F statistic, 26.355 ( p 0.0001); R2, 0.3452 (adjusted 0.3321), "i, error term for
subject i

Planned comparison
(dependent variable is
the number of value
added information
cues omitted)

Table IV.
Regression results
for the effects of
accounting knowledge

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5. Discussion and implications

This study provides empirical evidence that both high- and low-accounting knowledge
interfere with a decision makers ability to incorporate value added information in
wealth measurement and distribution decisions. The evidence supports the cognitive
processing literature suggestion that people rely on knowledge structures stored in
memory to guide their decisions. Basically, students with high- and low-accounting
knowledge made their wealth measurement and distribution decisions as if they access
from memory GAAP-based rules that do not include value added information. The
subjects with no-accounting knowledge at all seem to have intuitively thought of using
value added information in their wealth measurement and distribution decisions.
The results imply that while the use of value added information may be the most
intuitive way of measuring and distributing wealth, the accounting knowledge as
based on GAAP rules led the subjects to rely on profit measurement and dividend
distribution. This is another case showing the dysfunctional effect of accounting
knowledge where accounting knowledge seems to hinder performance in wealth
measurement and distribution decisions. The lack of fit between the accounting
knowledge structures based on GAAP recalled from memory and the wealth
measurement and distribution decisions that require consideration of value added
information contributes to the erosion of decision quality.
This experiment was run with subjects from a country (the USA) that does not
mandate the production and disclosure of a value added report. The results pertaining
to the omission of value added information in wealth measurement and distribution
need to be tested in a country context where the statement of value added is routinely
produced and disclosed and where the value added information is audited.
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Corresponding author
Ronald D. Picur can be contacted at: rpicur@uic.edu

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