Performance-Based Reporting – New Management Tools for Unpredictable Times,
By Hans V.A. Johnsson and Per Erik Kihlstedt

Nothing quite prepares the reader for the unbridled attack on the accounting profession, international standard setters, regulators and auditors. Johnsson and Kihlestedt leave no stone unturned in their forensic dismissal of accounting practice and theory. In fact nearly 90 pages of their entertaining book is devoted to pointing out the shortcomings of accounting methods as a reliable basis on which to assess company valuations, performance and prospects for success. Some of their criticism is a little harsh and possibly lays to much blame on accounting principles as opposed to auditing practice but the broad substance of what these two management consultants say is perfectly justified and adds to a chorus of criticism around the world suggesting that modern accounting is no longer ‘fit for purpose'.

It has long been recognised that balance sheets do not bear any relation to the true value of an organisation, particularly in the West where manufacturing has declined, service based industries are in the ascendancy and intangible assets such as brand and know-how assume much greater importance. In what the authors term the, ‘fourth economy', characterised by fast, unpredictable change, where wealth is created through intellectual property and relationships with a wide range of stakeholders is a condition of survival, traditional accounting has little relevance when assessing which companies will be successful. But according to the authors we do not have an alternative, systematic way of measuring these intangibles. Which is where this book comes into play.

Consigning accounting to a ‘backstage role', Johnsson and Kihlstedt embark on a fresh approach to measuring performance using a wide and imaginative set of lead indicators, based on ‘Baseline Fundamentals'. Even characteristics that in the minds of most accounting professionals do not normally lend themselves to measurement, such as relationships, ( “dominating”, “underdog”, “alliance” and “competitive”) – are calibrated and measured to three different levels! The writers say that this reflects important success/failure factors better than accounting-based systems but without the fuzziness that accountants associate with the word relationships.

In a rare concession to the accounting world the authors include cash performance in their Baseline Fundamentals but redirect it towards showing more clearly where the cash has come from and how it is used in relation to the strategic goals of the company. The latter strikes a particularly useful chord.

Whilst some of the introductory text will be very familiar territory to readers it provides a persuasive and useful chronology of the demise of traditional accounting. Furthermore, Johnsson's and Kihlstedt's alternative performance management model, The Baseline Approach ™ provides an interesting and thought provoking substitute. If you can withstand the massive assault on accounting principles then this work provides a useful framework for rediscovering the true value drivers of your business, re-visiting its strategy and setting performance measures appropriate to today's economy.