Do You Need a New Definition of Truth for Your Internal Decision Support Information?

Most cost information accountants generate and present is based on financial reporting standards and generally accepted accounting practices (GAAP). It is normally “truthful” to those standards. But is it “truthful” for other uses?

Internal decision support information needs to be “truthful” for economic realities that are more expansive and complex than accounting standards. How can both be truthful and different? This is truly a question the accounting profession needs to do a much better job of addressing. Many accountants are hesitant to leave the well-defined safety of their accounting standards and rules. The Profitability Analytics Framework provides a guide to an internal decision support oriented definition of “truthful”.

Let’s examine “Truth”. It has five major theories to define it according to Wikipedia:

• Correspondence Theory – Truth corresponds to facts.

• Coherence Theory – Proper fit of elements within a whole system.

• Constructivist Theory – Constructed by social processes

• Consensus Theory – Whatever is agreed upon

• Pragmatic Theory – Putting concepts into practice

Only the Correspondence Theory is relevant to science and the scientific method. All the other theories of truth contain social/human compromises.

What type of “truth” do you want to use for internal, long term decision making? Unless you are only looking at a quarterly bonus tied to financial statement results, you want to use the Correspondence theory to make long term value creating decisions. And that “truth” is what the Profitability Analytics Framework uses for modeling operations and cost for internal decision support. The Correspondence Theory of truth is what your operational systems use to help you optimize operations. (Not many operational systems are beholden to a group of people like the five accountants in Norwalk, CT (FASB) or the IASB to define standards for operating “truth”.)

Cost and operational information for internal decision making needs to reflect the “Laws of Nature”, or factual reality and causal relationships. Accounting standards for financial reporting are clearly “Laws of Men”, resulting from a social consensus process. Fortunately, this is not an “either/or” choice. You can, and should, have both operating in your organization.