A Brief Overview of Intellectual Capital and Analysis of the Edvinsson/Malone Framework

A Brief Overview of Intellectual Capital and Analysis of the Edvinsson/Malone Framework

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A Brief Overview of Intellectual Capital and Analysis of the Edvinsson/Malone Framework

Accounting is a science based on observation. As companies change, the way accountants observe companies must change. Traditional balance sheets, income statements, and statement of cash flows no longer adequately describe a company due to the rapid growth of knowledge-based companies, especially in technological sectors. The Internet and a growth in service industries are also accelerating the need for a change in the way we analyze a firm. Financial statements are failing to adequately describe "corporate vital signs" by ignoring the importance of ideas, brands, ways of working, and franchises. Intellectual Capital (IC) is important to the growth of a company, and investors need to know how a company maintains and evolves the IC within the organization, and how it channels the IC into its products and services.
It is believed that the economic boom of the last two decades is due to recent scientific breakthroughs and new information technology. A constant stream of innovations and productivity gains have enhanced the performance of the economy and driven up stock prices. There is a link between the IC of a firm and its ability to contribute to the economy.
The commissioner of the Securities Exchange Commission claims that it is because of lack of good measures that we see tremendous volatility in the knowledge sector . The investor demands higher return because of higher perceived risk, leading to an increases the cost of capital. Moreover, the market becomes inefficient because investors are allocating funds with limited information.
This paper is designed to outline the current state of the IC. The importance ...

... middle of paper ...

... accountants to make the IC numbers look better than they really are?
3. What about stockholder lawsuits over inaccurate measurement of IC?
4. Is it too difficult to obtain the information required for the IC report?
The Edvinsson/Malone framework has some features that can better aid investors and managers in assessing knowledge capital, thereby bringing stability to this highly turbulent area. However, the Edvinsson/Malone framework contains some frivolous aspects that should be removed. The framework serves as a good starting point from which refinement may occur.

The Edvinsson/Malone framework needs to be refined. The authors included frivolous materials such as gender ratio of managers and number of laptops and computers per employee. These measures do not incorporate with the definition of IC outlined in the beginning of this report.

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