Accounting, Auditing & Accountability Journal

Intellectual capital, m anage m ent accounting practices and corporate perfor m ance:
Perceptions of m anagers
Mike Tayles Richard H. Pike Saudah Sofian
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Mike Tayles Richard H. Pike Saudah Sofian, (2007),"Intellectual capital, management accounting practices
and corporate performance", Accounting, Auditing & Accountability Journal, Vol. 20 Iss 4 pp. 522 - 548
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Nick Bontis, William Chua Chong Keow, Stanley Richardson, (2000),"Intellectual capital and business
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Ming-Chin Chen, Shu-Ju Cheng, Yuhchang Hwang, (2005),"An empirical investigation of the relationship
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AAAJ
20,4 Intellectual capital, management
accounting practices and
corporate performance
522
Perceptions of managers
Received 19 August 2005
Revised 26 July 2006
Mike Tayles
Accepted 31 August 2006 Hull University, Hull, UK
Richard H. Pike
Bradford University School of Management, Bradford, UK, and
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Saudah Sofian
Universiti Teknologi Malaysia, Johor, Malaysia
Abstract
Purpose – The purpose of the paper was to examine whether, and in what way, managers perceive
that the level and shape of intellectual capital (IC) within firms influences management accounting
practice, specifically, performance measurement, planning and control, capital budgeting, and risk
management. It also explores whether such firms are better able to respond to unanticipated economic
and market changes and achieve relatively higher performance within their sector.
Design/methodology/approach – The paper is based on the results of a study conducted in
Malaysia through a questionnaire survey in 119 large companies with varying levels of IC and selected
interviews with both accounting and non-accounting executives in a subset of them.
Findings – The findings in the paper suggest some evolution in management accounting practices
for firms investing heavily in IC. The findings are discussed and further explored through interviews
in some of the firms analysed.
Research limitations/implications – The limitations of survey research in this paper are
acknowledged, however these are ameliorated by confirmatory insights from the interviews. Further
research could be carried out using more extensive case studies in companies, perhaps longitudinally,
or undertaken using sector focused surveys.
Practical implications – It is important to show in the paper that management accounting systems
reflect the strategic orientation of the companies concerned. Where a greater focus on intangibles and
intellectual capital occurs it may require a different emphasis on management accounting practices
compared to companies where they do not feature strongly. It is important that management recognise
and act on this in order to improve corporate performance.
Originality/value – The paper shows that it is widely recognised that (IC), whether in the form of
knowledge, experience, professional skill, good relationships, or technological capacity is a major source
of corporate competitive advantage. Whilst the literature places considerable attention on the valuation,
measurement and reporting of IC for external reporting purposes, far less attention has so far been given
to the implications of IC for managerial accounting practice. This paper addresses this omission.
Keywords Intellectual capital, Management accounting, Malaysia
Paper type Research paper
Accounting, Auditing &
Accountability Journal
Vol. 20 No. 4, 2007
pp. 522-548 Introduction
q Emerald Group Publishing Limited
0951-3574
The economic development currently experienced by much of business is characterised
DOI 10.1108/09513570710762575 by continuous innovation, the spread of digital and communication technologies, the
 relevance of network forms of organisation, and the prevalence of soft, intangible and Perceptions of
human factors in organisations. Firms operating within this so-called Intangible managers
Economy derive much of their wealth from intellectual capital (IC) where the real
competitive edge is located in the quality of relationships, structures and people
(Segelod, 1998). Knowledge creation, articulation, processing and leveraging have
become a central value-creation activity for modern enterprises (Wiig, 1997).
As managers become more aware of the role played by intangibles in generating 523
profitable business, new demands are being imposed on management accounting to
capture, measure and report IC value and performance (Marr and Chatzkel, 2004). If, as
Edvinsson and Sullivan (1996) argue, knowledge-driven firms derive their profits from
innovation and knowledge-intensive services, knowledge management requires
knowledge measurement. In this paper we call such knowledge-driven firms “high
IC firms”. In contrast, “low IC firms” do not create and deploy knowledge intensively
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and value creation is not dependent upon superior knowledge, structures and
relationships.
The IC literature in accounting is varied but mainly addresses external reporting
(e.g. Bukh et al., 2001; Guthrie, 2000 and Mouritsen et al., 2001a). External financial
statements offer very limited information on intangibles (Financial Accounting
Standards Board, 2001; Wallman, 1995). Some have argued that capital markets
require more reliable information regarding corporate knowledge resources such as
strategic direction, risk factors, experience, integrity and managerial qualities (Eccles
et al., 2001) and this is in part being met by intellectual capital information provided
through private channels such as presentations to analysts (Holland, 2003;
Garcia-Meca et al., 2005).
Management therefore needs to identify, measure, and communicate the value
drivers expected to improve information systems, performance measures and resource
allocation for investors (Ittner and Larcker, 1998). This suggests that organisations
with strong levels of IC should have developed management accounting and control
systems that support such endeavours. The theoretical argument that disclosure of
value content information on IC reduces transaction costs and uncertainty, and hence
mitigates adverse selection problems have been employed in relation to voluntary
disclosures to investors (Diamond and Verrechia, 1991; Lev, 1992; Botosan, 1997;
Healey et al., 1999; Leuz and Verrechia, 2000). These very same agency arguments
apply within the firm. Management accounting control systems should have evolved to
address such issues. However, as Roslender and Fincham (2001) observe, there is very
little empirical academic literature on how management accounting handles
intellectual capital and the practitioner-oriented literature has become repetitive.
This paper explores whether, and if so how, firms with high levels of IC have
developed their management accounting practices to address the issues that
accounting for IC promotes. It has been argued that accountants in such firms should
adopt a more strategic management accounting approach and focus on the evaluation,
appraisal, and measurement of IC to avoid neglecting the organization’s most valuable
resources (Tayles et al., 2002). However, it is unclear just what role management
accounting plays in relation to IC management in high IC companies. The paper
examines how management accounting practices evolve as organizations adapt their
management strategies and practices to reflect the growing knowledge-based
 AAAJ economy. Second, we consider whether high IC firms are more responsive to
20,4 unanticipated economic events and achieve higher relative performance levels.
The next section of this paper reviews the intellectual capital literature and its
relevance to management accounting and control. We then describe the research
method and data analysis. The summary results are presented and discussed next.
Finally we summarise the implications of our research and potential areas for further
524 research are identified.

Literature review
Intellectual capital (IC)
Intellectual capital (IC) has been defined by Klein and Prusak (1994) as “packaged
useful knowledge”. It basically constitutes knowledge, lore, ideas and innovations
(Sullivan, 2000).
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While earlier writers may not agree on the precise definition of IC, there is broad
consensus that it contains human capital, structural capital and relational capital
(Bontis, 1998; Edvinsson and Malone, 1997; Edvinsson and Sullivan, 1996; Lynn, 1998;
Roos et al., 1997; and Stewart, 1991, 1997). Human intellectual capital (HIC) captures the
knowledge, professional skill and experience, and creativity of employees. Structural
intellectual capital (SIC) consists of innovation capital (intellectual assets such as
patents) and process capital (organisational procedures and processes). Relational
intellectual capital (RIC) captures the knowledge of market channels, customer and
supplier relationships, and governmental or industry networks. Thus, IC is the
possession of knowledge and experience, professional knowledge and skill, good
relationships, and technological capacities, which when applied will give organisations
competitive advantage (CIMA, 2001).
Taking an ownership perspective two major components of IC are human capital
and intellectual or intangible assets. Whilst human capital cannot be owned by
companies, innovations produced through human capital can be transformed into
intellectual assets to which they have rights of ownership (Abeysekera and Guthrie,
2004), though this process is inevitably extremely complex to measure and manage. Its
importance was recognised in the Danish contribution to the Meritum Project
(Meritum, 2002), which emphasised that people provide the business competence,
customer relations, etc., which develop innovations and ensure competitive advantage.
Encouraged perhaps by the early work of Sveiby (Invisible Balance Sheet) and the
Intangible Asset Monitor, companies have endeavoured to focus on HIC and develop
performance measures. The call for accounting measurement seeking to track the
development of IC elements from HIC through RIC and SIC is strong.
A useful contribution to the discussion of this challenge is provided by Johanson
et al. (2001) who point out the important part that accounting approaches to IC play in
most companies, particularly through the application of rules and routines. This
involved greater attention to the incorporation of HIC related items in the balance sheet
and profit and loss account. They also found greater attention to the formalisation of
measurement practices, thus: “making ‘tacit’ knowledge about norms (search rules)
and activities (routines) explicit and thereby more easily communicated” (Johanson
et al., 2001, p. 729). The counter argument is that there is too much measurement of
these issues and that narratives are more appropriate than accounting numbers
 (Roslender and Fincham, 2004) pointing to potential conflicting interests and ethical Perceptions of
tensions. managers
Intellectual capital management (ICM) is the “direction” of the value-driven
transformation of human and relational capital into the structural capital of the
organisation (Lynn, 1998). Corporate processes (e.g. recruitment, training and
compensation) help foster creativity and innovation. Together with appropriate
technology and structural capital they create and share organisational knowledge 525
which, when exploited and applied to external knowledge and relational capital
produces corporate competitive advantage. The outputs of knowledge management
are innovations or intellectual assets. Intellectual assets such as patents and
trademarks are normally legalised in order to obtain legal, propriety rights upon them,
producing intellectual property. Together with structural capital (technology,
procedures, processes, etc.), tangible assets and relational capital they are managed
to create profitable new products and services. ICM therefore converts IC into
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intellectual assets, which, when commercialised increases corporate value (Roos et al.,
1997; Edvinsson and Malone, 1997; Edvinsson and Sullivan, 1996; Webster et al., 2004).
Accounting research into IC has followed various directions, for example, Grojer
and Johanson (1998) remind us that some aspects of accounting for IC may have
originated in human resource costing, which seems to have experienced reduced focus
in recent decades. The dormant nature of this is also referred to by Roslender and
Fincham (2001) in their critical thinking on IC, when they pose the question what form
accounting for IC should take. Dealing with matters external to the firm Stolowy and
Jeny-Cazavan (2001) address the setting of standards for financial reporting of
intangibles, in relation to which Holland (2003) contrasts a more market-based
approach, when data is used by institutional fund managers. Related to this topic,
Amir et al. (2003) have undertaken a quantitative analysis focusing particularly on
R&D. Bukh (2003) comments on the need for firms’ disclosure on IC to be part of the
framework of value creation processes within the firm in order to be seen as relevant
by the capital market, whilst a method to develop a latent index to proxy performance
elements of human capital assets has been developed proposed by Abdel-Khalid (2003).
Collier (2001) points out that the intellectual capital of an organisation may be
different from its intellectual capacity, contrasting a flow rather than stock approach.
Mouritsen et al. (2001b) develop some of this in their report of numbering, visualisation
and narratives in the accounting for IC at Skandia. Van der Meer-Kooistra and Zijlstra
(2001) in reviewing IC reporting models convey their experiences of IC accounting in
some Danish companies also drawing attention to the audit complexity that may apply
in some aspects of reporting. Acknowledging that the antecedents of today’s
intellectual capital movement lie in practice, Petty and Guthrie (2000) suggest it is
desirable that researchers keep their work focussed on business practice. A point
supported by the work of Chaminade and Roberts (2003) in implementing intellectual
capital reporting systems in Norway and Spain. Related to this Guthrie et al. (2001)
point to two IC “missions” on which this paper throws some light, being systems for
creating, capturing and disseminating IC and measures and ways of reporting value
attributable to IC within organisations. Tayles et al. (2002) have some suggestions on
this latter point on which this paper offers an empirical contribution.
In the rest of this section we examine a number of management accounting practices
(MAPs) and suggest from the contemporary literature how high IC firms may be
 AAAJ expected to develop such practices. Arguably, the decision to become IC intensive is
20,4 strategic, whether emergent or deliberate. We have placed emphasis therefore on
MAPs, which have a strategic orientation, with a particular focus on performance
measurement, management control and decision-making. This is in line with the
attempts of some writers to contribute to a conceptual framework of strategic
management accounting (Tomkins and Carr, 1996, Guilding et al. 2000). These are the
526 topics areas on which other writers in the Knowledge Management and Intellectual
Capital field have also placed focus, for example, Mouritsen (1998), Tayles et al. (2002)
and Mouritsen and Larsen (2005).

Performance measurement
Strategy is a pattern of resource allocation that enables a firm to maintain or improve
performance that creates “fitness” among a company’s activities. Simons (1990)
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observes that performance measurement is tracking the implementation of business

strategy by comparing actual results against strategic goals and objectives. As
performance is a result of an activity (Porter and Millar, 1985) performance must be
measured in order to analyse strategies. Performance measurement is perhaps the most
important, yet most misunderstood and most difficult, task in management accounting
(Atkinson et al., 1995). Neely (1998) suggests that performance measurement “is the
process of quantifying past action”.
Traditional accounting performance measurement employs financial techniques
such as Return on Assets (ROA) and Return on Capital Employed (ROCE). These have
been criticised for being backward looking, unable to measure intangible resources and
not suitable for assessing performance of investments in new technologies and markets
which firms require to compete successfully in global markets (Bourne et al., 2000;
Amir and Lev, 1996).
Recent years have witnessed a move towards financial measures, such as Economic
Profit type measures[1] which are more closely linked to shareholder value (O’Hanlon
and Peasnell, 1998). These performance measures yield the same discounted present
values as free cash flow, thereby retaining the focus of accounting profit on the
matching of costs and revenues without losing value-relevance. Value relevance of
Economic Profit is achieved by the numerous adjustments to conventional financial
reports to reflect hidden assets such as intangibles and long-term investments. There is
a high degree of uncertainty in intangibles and long-term investments, such as
capitalisation and amortisation of R&D, market building, restructuring charges, and
other strategic investments with deferred pay off patterns (Barsky and Bremser, 1999;
Simons, 1990). Thus Economic Profit has been advocated as an appropriate IC
performance measure.
In the early 1990s, various performance measurement frameworks were developed,
to overcome the weaknesses of financial-only measures (Bourne et al., 2000). Such
models place greater focus on intangible resources (Amir and Lev, 1996) such as key
customers, internal processes and learning, (Simons, 1990). Commonly used models
include Intangible Assets Monitor (Edvinsson and Malone, 1997), and Skandia
Navigator (Sveiby, 1997) which were particularly developed with intellectual capital in
mind and the Balanced Scorecard (Kaplan and Norton, 1996; Lipe and Salterio, 2000)
which had a more general strategic focus. The Balanced Scorecard (BSC), for example,
considers relational capital (customer perspective), structural and human capital
 (innovation, learning, and internal perspectives) and the impact of IC on shareholder Perceptions of
goals (financial perspective). Whilst the original advocacy was to help support and managers
map strategy with a strong consultancy emphasis, it has latterly been suggested to
address IC aspects (Kaplan and Norton, 2004). Lev (2001) advocates the Value Chain
Scoreboard, to be used by both management and investors, which seeks to report in a
structured manner the impact of intangibles on corporate performance and valuation.
As many of these performance measurement frameworks have been developed or 527
adapted to accommodate IC, we expect to find these to be more in evidence in firms
with high IC investment. This leads us to suggest that firms with relatively high IC are
more likely to employ non-financial measures and performance measurement
framework approaches involving balanced, multi-dimensional measurement, and
economic profit-type approaches linked to shareholder value and requiring recognition
of intangibles within the asset base.
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Budgets and control

All listed companies face external pressures for earnings estimates and detailed
forecasting, this is likely to have an impact on internal budgeting processes.
Accounting-based budgetary controls are an integral part of the management control
system in organisations (Webb, 2002; Van der Stede, 2001; Armstrong et al., 1996).
Exactly how this planning and control manifests itself may be different in
organisations with different levels of IC. There is, for example, growing recognition of
the limitations of conventional budgeting (e.g. Stewart, 1990; Bunce et al., 1995;
Fanning, 2000; Hope and Fraser, 2001; Jensen, 2001; Wallander, 1999; Hansen et al.,
2003; Marginson and Ogden, 2005). Contemporary suggestions for improvement
include approaches such as zero-based budgeting, priority-based budgeting,
activity-based budgeting and regular re-forecasting (Fanning, 2000). However, they
can be bureaucratic, internally focused and time consuming. Budgeting has thus been
described as being “out of sync” with the information age (Hope and Fraser, 1997) and
that Knowledge firms should reduce or even eliminate the emphasis on conventional
budgeting (Hope and Fraser, 1997, 1999; Stewart, 1990; Wallander, 1999). Some high IC
firms (such as Svenska Handelsbanka, the largest commercial bank in Sweden) claim
to have benefited from this reduced emphasis. The “Beyond Budgeting” model, based
on enterprise, innovation, and empowerment, is offered as more relevant to the
“information age” (Fanning, 2000). This model involves separating target setting from
financial planning and more frequent high-level financial forecasting. In their case
research into the management control of intangibles, Johanson et al. (2001) observed in
one company:
. . . Budgets are no longer done and instead scenario orientated business plans are performed.
The control process of intangibles consists of sub-processes including recurrent meetings,
benchmarking, target setting, assigning ownership . . . (p. 723).
Work originating with Hopwood (1973) identified three management styles for
evaluating performance using budgets:
(1) A budget constrained style, where evaluation of performance is based on the
ability of the manager to meet the budget on a short-term basis;
 AAAJ (2) A profit conscious style, where evaluation is based on the ability of the manager
20,4 to increase the general effectiveness of the unit in terms of the long-term
objectives of the organisation; and
(3) A non-accounting style, where evaluation of performance is based largely on
non-accounting information and budgeting plays a relatively unimportant part
in a superior’s evaluation of performance.
528
Fanning (2000) suggests that the non-accounting style is more appropriate for high IC
firms because budgeting tends to focus on short-term financial inputs and outputs.
We thus suggest that traditional hierarchical budgeting and budget-constrained
style may apply to traditionally structured firms with low IC. High IC firms will place
less reliance on budgeting in both its traditional and “zero-base” forms, preferring more
frequent forecasting, and separate target setting (that is following the beyond
budgeting concept). They are also more likely to, adopt a non-accounting evaluation
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style. We expect the above to be more apparent where Human and Relational capital
are emphasised.

Capital budgeting
Whilst the capital budgeting literature over the past 20 years has developed
increasingly sophisticated financial appraisal approaches, corporate reality suggests
the importance of managers considering the strategic benefits of long-term assets.
Thus NPV techniques are complemented by a broader strategic cost management
approach such as value chain analyses, cost driver analysis, and competitive
advantage analysis (Carr and Tomkins, 1996).
Carr and Tomkins’ research (1996) found that companies pay less attention to
traditional capital budgeting techniques, while others suggest that traditional
appraisal techniques are no longer appropriate for intangible investments given the
non-financial benefits and inter-related cost complexity that exists (Irani et al., 1998).
Mouck (2000) argues that “The traditional capital budgeting model is virtually useless
for the high-tech, knowledge-based, increasing returns sectors of the economy”.
Increasingly, firms invest less in tangible assets, and more in R&D, training,
marketing, software, and other intangibles. These are hard to justify using
conventional capital budgeting tools (Irani et al., 1998).
The growing literature on real options (Trigeorgis, 1996; Neil and Hickey, 2001; Seth
and Sung, 2001) considers the value of option-like features within capital investment
decisions. Real options valuation extends the traditional capital budgeting approach
by providing a more appropriate evaluation of strategic investments. Of particular
relevance to this study is the strategic or follow-on option. High IC firms that have
invested heavily in innovation will be in a better position to exploit future
opportunities, as yet unidentified. These strategic options would include such areas as
entering new markets, development of follow-on products, and development of brand
extension. A rigorous analysis on real options, even within large firms such as those
surveyed, is still rare, and there is currently debate about the most appropriate way
that this can find its way into practice (Copeland and Antikarov, 2005). However, this is
not to say that managers involved in investment decision making, such as large-scale
expenditures on R&D, new product development and advanced manufacturing
technology, do not consider the value of real options. Derregia and Chittenden (2004), in
 a study of UK firms, observe real option-like thinking processes among managers in Perceptions of
considering investment projects, frequently using simpler versions of real options managers
models to evaluate investment opportunities (for example, Stark, 1990).
Valuation of IC investment is generally complex, where much of the value is
attributable to flexibility and learning over time. Strategic flexibility provides
corporate management with real options to exploit future events as they present
themselves. The resource-based view of the firm argues that sustained competitive 529
advantage derives from the firm’s resources and capabilities – bundles of tangible and
intangible assets, including management skill, organisational processes and routines,
and the information and knowledge it controls (Barney, 2001). High IC firms, with a
strong focus on managerial creativity, innovation, intellectual property, customer
relationships, and knowledge embedded in information technology, typically possess
considerable strategic flexibility. Traditional DCF models do not capture the value of
options embedded in corporate decisions. Follow-on investment opportunities are
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typically intangible and speculative. Companies with relatively high IC possess greater
strategic flexibility, and are therefore expected to place less reliance on conventional
capital budgeting approaches such as net present value. This is expected to be more
pronounced where structural capital is the IC focus because follow-on options are more
easily identifiable.

Economic exposure and business performance

Risk management is the process of analysing economic exposure to risk and
determining how best to handle such exposure. Risks can be minimised or avoided
through appropriate risk management practices. Given the above discussion on
strategic flexibility, real options and adopting a resource-based view of the firm, we
expect that firms with high levels of IC – particularly in the form of creativity,
intellectual assets, and relational capital – are better positioned to be able to withstand,
and even exploit, the effects of unanticipated changes in markets and economies. This
presumes of course that companies always use their IC to advantage, which may not
always be the case.
IC can have a significant impact on value creation and the value of the firm. The
question is whether IC can also help management cope with uncertainties in product
and financial markets. One argument is that IC offers valuable protection during
economic downturns through patents, brands, customer relationships, flexibility and
inventiveness, enabling the firm to be more competitive than low-IC firms. However, a
contrary view (Lev and Zarowin, 1999) argues that given the growing asymmetry in
relevant information disclosure and the apparently deteriorating association between
earnings and stock prices, there is greater scope for surprise resulting in greater stock
price volatility for high IC firms. In other words, while the resource-based view argues
that the firm is better positioned than other firms during economic downturns,
information asymmetry suggests that investors are not able to observe this through
information disclosures, leading them to rely more heavily on the better understood
value content of tangible assets. For this reason, we expect to find that high IC firms
are not better equipped to withstand stock market downturns.
Finally, we consider how the level of IC may impact on corporate performance. This
study does not employ secondary data sources for accounting and stock market
performance. Rather, it asked senior executives to give their perception of the
 AAAJ performance – both financial and non-financial – relative to their sector. Such
20,4 respondents are well positioned to address such issues as market leadership,
competitiveness, new product development success, as well as financial performance in
accounting and stock market terms[2].
We expect that, within an industry sector, high IC firms possess the resources to
outperform firms with low levels of IC. While this may not necessarily be reflected in
530 short-term financial performance, it should be evidenced in terms of industry
leadership, competitiveness, and successful new product development. Superior
performance on these dimensions should in the longer term be reflected in financial
accounts and stock market performance measures.

Research method
In this research we seek to examine how MAPs found in firms vary with the level and
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shape of IC, in terms of human, structural, and relational capital. We then explore the
impact of IC on perceived corporate performance. The conceptual framework is shown
in Figure 1.
This framework identifies a number of MAPs expected to be influenced by IC
intensity. We earlier identified the main MAP categories as reporting and decisions,
performance measurement, budgetary control and capital investment analysis. IC
intensity is also assumed to give rise to higher levels of performance and an ability to
respond to economic uncertainty.

Figure 1.
Conceptual framework
 The nature of the study is both exploratory and descriptive. Most prior research on IC Perceptions of
has employed questionnaire surveys only in data collection (e.g. Bontis, 1998; Dooley, managers
2000; Lovero, 2000; Reeds, 2000; Usoff et al., 2002), this study uses both a questionnaire
and semi-structured interviews. The research was conducted in Malaysia, the fifth
most competitive country in the world according to the 2004 World Competitiveness
Yearbook. The country has, for some years, developed a Multimedia Super Corridor
close to where the companies involved in this research are located. In spite of this being 531
a developing economy, research into intellectual capital in developing nations has been
undertaken successfully before (Abeysekera and Guthrie, 2004). The companies were
randomly selected from Kuala Lumpur Stock Exchange (KLSE) lists, mostly drawn
from four broad sectors, where IC is expected to be beneficial. Data were collected,
during 2003, through a questionnaire survey and interviews were conducted with both
accounting and non-accounting executives in selected companies.
Questionnaires were distributed to accountants/financial managers in 193
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companies listed on the KLSE. The initial and second mail shots produced useable
responses from 85 companies, an effective response rate of 44 per cent. Approximately
half the responses came from four sectors identified by Edvinsson and Malone (1997)
as having a strong emphasis on IC – technology, consumer products, trading and
services, and finance. The sample was supplemented by a further 34 responses drawn
from large, unlisted, firms, producing a final sample total of 119 firms[3].
The questionnaire asked respondents to indicate their agreement to 25 questions (on
a 1-7 scale) on a range of questions relating to their company’s emphasis on IC. This
formed the basis on which level and shape of IC was established. These questions were
drawn from earlier work that was used to explore the nature of intellectual capital,
(Bontis, 1998; Reeds, 2000; Usoff et al., 2002). These items have already been tested in
terms of reliability in the earlier published research. Responses were used to construct
variables for human (HIC), structural (SIC), and relational (RIC) capital.
The questionnaire then required responses to 76 other items covering management
accounting practices, economic exposure and performance. Some of these were
personally developed based on the literature, whilst others were adopted or adapted
from prior work of Bontis (1998), Reeds (2000), Usoff et al. (2002), Hopwood (1973),
Hope and Fraser (1997), Irani et al. (1998), Segelod (1998, 2000), and Fanning (2000).
The questionnaire asked respondents to indicate the degree of importance, the nature
and use (1-7 scale) of a range of management accounting practices in their organisation.
This was undertaken in the areas of reporting and decisions, performance
measurement, accounting style, budgetary control, and capital budgeting, as
outlined in the literature above. Finally, the questionnaire raised questions on
perceived performance (financial, non-financial, and overall performance) of the
companies in terms of the respondent’s sector.
Further insights were obtained from interviews with senior managers in four
companies in the Kuala Lumpur area who participated in the survey. This involved
companies engaged in software and telecommunications, manufacturing,
broadcasting, and banking. They were conducted with accountants, human resource
managers, marketing managers and intellectual capital/knowledge managers, as
appropriate, in each of the companies. These interviews provided valuable insights
that could not be achieved through postal survey, through further explanation and
commentary, which broadly confirmed the survey findings.
 AAAJ Table I summarises the descriptive statistics for IC survey questions and
20,4 constructs.
Analysis of descriptive statistics, tests for reliability, and response bias all indicate
that the responses used in this study meet the levels of reliability and validity required
for meaningful further analysis[4]. Inter-item correlation and Cronbach alpha scores
were used to estimate the reliability of the scales[5] and confirm that the scales
532
Inter-item
Variables N Range Mean SD corr. Alpha

IC importance 5.17 1.08 0.69

Degree of IC 109 2-7 5.14 1.34 0.36
Importance of IC 109 3-7 5.84 0.98 0.53
Knowledge or IC 107 1-7 5.32 1.50 0.19
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IC reporting 4.70 1.62 0.72

IC info published in annual report 90 1-7 3.47 1.74 0.41
IC reported internally 98 1-7 4.67 1.68 0.67
IC referred to in strategic decisions 96 1-7 5.27 1.43 0.56
Human Intellectual Capital (HIC) 5.55 0.79 0.82
Managers selected according to their brightness
and creativity 112 1-7 5.32 1.30 0.53
Managers and staff are committed 113 2-7 5.50 1.11 0.72
Staff are required to share knowledge 114 3-7 5.83 0.99 0.40
Staff are experts in their jobs 114 3-7 5.74 0.88 0.59
Managers and staff are innovative 115 3-7 5.39 1.08 0.64
Staff are able to focus on quality 115 2-7 5.53 1.10 0.66
Structural Intellectual Capital (SIC) 5.07 1.00 0.87
Relevant information are easy to access 114 1-7 5.16 1.35 0.54
Systems/procedures support innovation 113 2-7 5.07 1.27 0.65
Systems/procedures require knowledge sharing
and encourages learning 113 2-7 5.71 1.12 0.45
Investment in innovation is high 110 1-7 4.85 1.50 0.61
Intellectual assets are tracked and used fully 95 1-7 4.81 1.85 0.61
Innovation rate is high compared to competitors 98 1-7 4.83 1.46 0.60
High annual allocation is provided for IT 109 2-7 5.00 1.32 0.70
Knowledge is documented in manuals,
database, etc. 113 1-7 4.98 1.44 0.60
Vital knowledge is protected to prevent loss in
case prominent staff leave 114 1-7 5.09 1.41 0.79
Relational Intellectual Capital (RIC) 5.49 0.90 0.92
Customers are loyal 112 1-7 5.13 1.20 0.66
Market-oriented/customer-focused 114 2-7 5.60 1.23 0.73
Efficient in satisfying customers 113 2-7 5.28 1.21 0.84
Understand target segments and customer
profiles 113 2-7 5.51 1.09 0.79
Gets strong feedback from customers 114 1-7 5.41 1.27 0.78
Continually meet with customers 112 2-7 5.50 1.25 0.71
Listen and respond to customer complaint 112 2-7 5.63 1.07 0.72
Table I. Have good relationships with suppliers 109 1-7 5.64 0.99 0.51
Constructs and Give time to vetting/ approving suppliers 108 1-7 5.39 1.15 0.60
descriptive statistics of IC Maintain long-standing relationship with
survey items suppliers 107 1-7 5.85 1.04 0.55
 employed were internally consistent. These reduced to the three main composite IC Perceptions of
variables – Human, Structural and Relational Capital, with acceptable reliability managers
coefficients (between 0.82 and 0.92).

Findings and discussion

From Table I we observe that, while there is considerable variety in responses, the
mean response for most questions is around 5 (“moderately important”). The study did 533
not seek to categorise responding firms into “high” and “low” IC. Rather, it found
associations between forms of IC (human, relational, structural), MAP and corporate
performance.
The table reveals that the term “knowledge”, rather than IC, is used by most firms.
As expected, there is only moderate agreement that IC information is reported in or
with the annual report. However, there is stronger agreement that IC is reported
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internally and in analysing strategic decisions. Respondents recognised all three main
forms of IC, but it was most evidenced in human capital (5.5) and least on structural
capital (5.1). In that only structural capital is truly transformed into intellectual assets,
this demonstrates the challenge for firms seeking to use other forms of IC to leverage
long-term value.

Association with underlying factors of intellectual capital

Principal Component Analysis was conducted on management accounting and
performance questions to reduce the number of variables tested in the questionnaire to
their underlying dimensions and create a more manageable and parsimonious set.
These related to each main area of interest, namely performance measurement, budget
control style, capital budgeting approach, economic exposure management and
business performance.
The factor loading for each item and its corresponding construct was determined.
Varimax rotation was used to rotate the factors in order to simplify the columns of the
factor matrix[6]. A total of 12 factors were obtained from 61 management accounting
practices and business performance items. Spearman-Rho’s Rank Correlation was
employed to identify associations between variables.
Table II summarises the descriptive statistics of the MAP questions in the survey
and shows the eight factors created by PCA, together with reliability coefficients.
Questions pertaining to performance measurement reduced to factors for P&L, value,
financial/non-financial and performance measurement frameworks. Table III gives
descriptive statistics for two economic exposure constructs (Stock market impact and
Ability to respond to economic uncertainty) and three performance constructs
(financial, non-financial and overall performance).
Table IV summarises the associations between IC and a number of assertions about
accounting practices, analysed by type of IC. As expected, firms with higher levels of
IC are more likely to report IC internally, to refer to IC information in decision making,
and to capture IC in performance measures. Only in the case of SIC, where investment
is more easily defined and measurable, are high IC firms associated with capital
budgeting procedures that attempt to capture intangible costs and benefits and to
define and review intangible investment. This is in line with some of the contemporary
literature, which emphasises the difficulty in accounting for HIC (see, for example,
Johanson et al., 2001; Mouritsen et al., 2001b).
 AAAJ
Inter-item
20,4 Variables N Range Mean SD corr. Alpha

P&L measures 6.52 0.71 0.47

Sales 112 4-7 6.57 0.67 0.66
Profitability 111 2-7 6.50 0.77 0.74
534 Value-based measures 5.12 1.15 0.77
EVA 93 1-7 4.56 1.82 0.47
Target profit 114 1-7 6.19 1.13 0.59
Shareholder value 108 1-7 5.77 1.49 0.65
Properly account for all ways in which
corporate value could be added or lost 111 1-7 4.95 1.26 0.51
Incentive structure based on value creation 105 1-7 5.10 1.38 0.61
Financial and non-financial 5.14 1.23 0.63
Measures IC measured in both financial and
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non-financial terms 110 1-7 5.73 1.18 0.36

IC contribution captured in performance
measurement 100 1-7 4.51 1.60 0.35
Focus on future success 109 1-7 4.94 1.37 0.24
Focus on past performance 111 1-7 5.17 1.29 0.18
Financial focus 113 1-7 5.27 1.45 0.04
Performance measurement frameworks 44.1 1.82 0.89
BSC 67 1-7 4.61 1.92 0.57
Intangible asset monitor 47 1-7 3.28 1.84 0.75
Tableau de Bord 27 1-7 2.37 1.57 0.93
Skandia navigator 27 1-7 2.48 1.76 0.90
Performance prism 39 1-7 3.64 2.08 0.62
Budget control style 6.09 1.05 0.84
Budget emphasis 107 1-7 6.08 1.18 0.43
Concern with ability to meet budget 112 3-7 6.15 0.90 0.46
Concern with cost 113 2-7 6.21 0.87 0.52
Concern with ability to increase general
effectiveness 113 1-7 5.93 1.10 0.75
Concern with quality 113 1-7 5.97 1.14 0.65
Concern with ability to handle subordinates 113 1-7 5.27 1.34 0.67
Concern with effort put on the job 114 1-7 5.68 1.16 0.69
Beyond budgeting 4.64 1.57 0.48
Regular re-forecasting 88 1-7 5.18 1.68 0.57
Separates target setting from financial
planning 101 1-7 4.55 1.75 0.56
Uses rolling forecasts 95 1-7 4.32 1.98 0.72
Capital budgeting method 5.05 1.64 0.78
ROCE/ARR 103 1-7 5.75 1.41 0.47
NPV 96 1-7 4.89 1.76 0.64
IRR 101 1-7 5.04 1.74 0.72
Payback period 99 1-7 5.53 1.40 0.56
Real option value 51 1-7 3.12 1.70 0.53
Assessing intangible investments 4.66 1.67 0.82
Finance methods unable to capture IC costs
Table II. /benefits 101 1-7 4.55 1.74 0.35
Constructs and No system for defining/reviewing intangible
descriptive statistics of projects 97 1-7 4.69 1.81 0.34
management accounting Acceptance of negative NPV in investment
practices appraisals 84 1-7 2.67 1.71 0.12
 Perceptions of
Inter-item
N Range Mean SD corr. Alpha managers
Stock market influence 4.93 1.03 0.57
Firm is less affected by fall in stock market 109 1-7 4.81 1.75 0.41
Firms will not overreact to fall in stock market 102 1-7 4.98 1.48 0.41
Ability to respond to economic uncertainties 4.70 1.31 0.50 535
Staff creativity/innovation ensures long-term
survival 112 1-7 5.28 1.20 0.34
IC acts as hedge against unanticipated economic
change 96 1-7 4.67 1.50 0.33
Financial performance indicators 5.35 1.06 0.91
After-tax return on assets 114 2-7 5.00 1.07 0.79
After-tax return on sales 108 2-7 5.00 1.11 0.72
Profit growth 114 2-7 5.25 1.17 0.82
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Sales growth 112 2-7 5.41 1.04 0.72

Profit 115 2-7 5.40 1.11 0.73
Non-financial performance indicators 5.11 0.92 0.83
Industry leadership 114 1-7 5.31 1.41 0.73 Table III.
Success rate in new product launches 102 1-7 5.21 1.27 0.56 Constructs and
Future outlook 115 2-7 5.47 1.08 0.79 descriptive statistics of
Overall response to competition 111 1-7 5.40 1.13 0.70 performance and
Overall business performance 115 2-7 5.62 1.00 0.76 volatility measures

Importance of: HIC SIC RIC

Reference to IC in management accounting practices

Majority of investments are intangible 0.312 * * 0.466 * * 0.212 *
Internal IC reporting 0.347 * * 0.475 * * 0.366 * *
Reference to IC information in strategic decisions 0.370 * * 0.489 * * 0.357 * *
Performance measures capture IC contribution 0.512 * * 0.608 * * 0.502 * *
Inability of financial methods to capture intangible costs and
benefits 20.090 20.209 * 2 0.099 Table IV.
No system for defining, requesting and reviewing intangible Associations between IC
investments 20.194 20.276 * * 2 0.149 level and use of IC in
management accounting
Notes: Significance levels: * ¼ 0.05, * * ¼ 0.01 practices (n ¼ 119 firms)

Management within the case companies tended to use the term “Knowledge” rather
than IC, with the exception of the software company, which applied the term
“Intellectual Property”. This company had the most advanced intellectual capital
management process, coordinated by a Director of Intellectual Capital. None of the case
companies published additional IC information in or with the annual report, though all
of them reported it internally and referred to it in strategic decisions. The Broadcasting
company was an interesting example of this, observing that the reports on the
production houses were “indirectly reports on IC”.

Performance measurement
Table V summarises the association of MAPs such as performance measurement,
control style and capital budgeting process with the three main forms of IC, and shows
 AAAJ
Importance of HIC SIC RIC Variables loaded on factors
20,4
Performance measurement
Importance of:
Value-based financial performance 0.294 * * 0.408 * * 0.410 * * Shareholder value, EVA, Incentive
measures structure base on value creation,
536 accounts for corporate value
Profit and loss accounts-based 0.175 * 0.151 0.115 Sales, profitability
financial performance measures
Performance measurement 20.032 .089 20.105 Intangible assets monitor, Tableau
frameworks de Bord, Skandia navigator, BSC,
Performance prism
Financial and non-financial 0.542 * * 0.599 * * 0.579 * * Performance measures include
measures both financial and non-financial
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aspects
Control style
Business emphasis 0.523 * * 0.455 * *
0.488 * * Concern with: cost, general
effectiveness, quality, ability to
handle subordinates, job effort
Budget emphasis 0.033 0.044 20.035 Budget emphasis, ability to meet
budget
Forecasting 0.239 * * 0.180 0.231 * Separates target setting from
financial planning, rolling
forecasts, regular re-forecasting
Non-conventional budget 0.109 0.233 * 0.132 Zero-based budgeting
Priority-based budgeting
Capital budgeting process
Financial measures 0.314 * * 0.321 * * 0.257 * * Use of NPV, IRR
Table V. Acceptance of negative NPVs and 0.085 0.160 * 20.107 Acceptance of negative NPV in
Associations between IC use of real options capital investment appraisals, use
variables and of real options approach
management accounting
practices Notes: Significance levels: *=0.05, * *=0.01

the main questions that loaded on to each factor. Regarding performance measurement
we see that value based approaches such as Shareholder Value Analysis, EVAw and
incentive structures linked to value are strongly associated with high levels of human,
structural and relational capital. It should be noted that both of these value-based
approaches require estimation of the value of IC.
While there is little evidence that high IC firms have discarded traditional financial
measures such as sales and profit, they attach significantly greater importance to
employing a combination of financial and non-financial performance measures. This
recognises that IC impact cannot be assessed purely in financial terms, suggesting that
performance measurement frameworks should be highly suitable to such firms.
However, looking at the specific performance measurement frameworks used by the
sample firms, we observe that there is no association between their adoption and the
degree of IC in firms. Adoption of comprehensive performance measurement models is
generally low. Some of the techniques and frameworks, which have specific relevance
 to IC, such as the Intangible Asset Monitor or Skandia Navigator, are hardly Perceptions of
recognised in Malaysian organisations. But as these frameworks, other research such managers
as the more recent Danish experiments (Meritum, 2002) and the challenge posed by
management of intangibles receive greater exposure through international discussion,
it may be that they will be more adopted. Although there was general awareness of the
Balanced Scorecard approach, it was not widely used, nor was it viewed as an
important tool in ICM. Adoption of specific frameworks such as the Balanced 537
Scorecard has been suggested, by some, to be a case of following a particular fashion or
industry leader, a sort of “me too” phenomenon. There is some evidence here to support
the notion of the adoption and spread of new techniques being influenced by
Institutional factors, a sort of institutional isomorphism (DiMaggio and Powell, 1983)
rather than a need identified specifically through an association with the level of IC in
the firm; or it may be that they are simply perceived not to work for these companies.
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For example, Mouritsen et al. (2005) have pointed to differences between the theoretical
underpinnings of the balanced scorecard and intellectual capital.
Interviews with accountants in the case companies found that superiors gave
importance to both financial and non-financial matters in evaluating their
performances. All companies interviewed confirmed that they used a combination of
both financial and non-financial measures. All except the broadcasting company
viewed this as a first step towards a performance measurement framework such as the
Balanced Scorecard but few had taken it further. Sales and profitability remain the
most frequently employed measures, although the software and the manufacturing
companies both employed EVAw as one of their financial measures. The IC director of
the software company commented:
The performance measures must be understood by the persons in charge. In the past the
system has been more in the form of financial measures. A non-financial performance
measurement system is definitely planned for increased use in the future.
However, the financial manager was still not convinced:
No matter what approach is being used for performance measurement, the bottom line is still
financial figures, i.e. financial reports that top management and investors want to look at.
Tension between the two views on the appropriate form of performance measure was
observed, with the IC director concluding:
We have a lot of innovations going on, definitely, innovation here is not just in technological
form, but also business innovations. The innovation is how we approach the market, how we
design solution for customers, and so on. The challenge is how effective it is to convert
innovations into revenues. We shouldn’t just document the innovations, but also
commercialise them.
In the manufacturing company the financial accountant pointed out:
. . . the company has both financial and non-financial measures for performance. For example, it
measures the motivational climate of the company, i.e. whether people of the company are
happy or not, by using a “global people survey”. The other measures are statistical, for
measuring efficiency and effectiveness, such as stock holding, capacity utilisation, and
customer service. However these non-financial measures are not conveyed in the annual report.
 AAAJ In the Bank the VP finance observed that all banks had to comply with the controls
20,4 applied by the Central Bank, these are currently mainly financial. The bank had
however developed a number of non-financial measures, he confirmed:
Some examples of the bank’s non-financial measures are efficiency measures, such as
turnaround time, loan processing time, counter service (customer queuing time), and
customer complaints’ processing time. BSC was introduced by the bank’s consultant in 2002,
538 and has been implemented since January 2003, starting with the marketing department. It is
still too early to assess the progress of the BSC implementation.
From our examination of the performance measurement systems in knowledge-driven
firms we conclude that there is greater emphasis on value-based measurement
approaches and growing emphasis on a combination of financial and non-financial
measures that have yet to be established in scorecard type models that adequately
measure the IC contribution. This seems to be a partial confirmation that IC resources
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are seen as performance drivers of value creation and part of the causal link between
skills and relationships, which deliver customer satisfaction, loyalty and ultimately
customer value. This suggests scope for more work to be undertaken taken to establish
credible cause-effect relationships as part of a process of performance measurement
improvement process (Neely et al., 2002).

Budgets and control

Table V also draws attention to how budget style and approach vary according to the IC
emphasis. In terms of an accounting evaluation style we are able to distinguish between
firms with styles that either emphasise the budget or have a broader orientation which we
term business emphasis, the latter focusing on concerns for general effectiveness, quality,
cost, handling staff, and job effort. High IC firms are strongly associated with a business
focus but not with a budget emphasis. This supports earlier arguments that the typical
short-term budgeting focus is not consistent with high IC firms (Johanson et al., 2001).
From the responses we find that firms with high IC levels typically place less
emphasis on ability to meet budget targets nor do they take an exclusive budget
emphasis. Concern for quality and improved general effectiveness are associated with
all three forms of IC. Firms with high levels of Human Capital and Relational Capital
are associated with use of regular re-forecasting, target setting, and rolling forecasts –
a style we categorise as “Forecasting”. The non-conventional budget styles such as
Activity-Based Budgeting, and Priority-Based Budgeting is associated with high levels
of structural capital such as research and development but does not feature
significantly in the context of human or relational capital.
Paradoxically, interviews in the case companies revealed that managers espoused
that a relatively strong budget emphasis existed in their companies, that is, emphasis
on the budget and an ability to meet the budget. However, they also recognised the
importance of ability to increase the general effectiveness of the unit in addition to a
concern for cost. There was little evidence of a more relaxed or “flexible” budgeting
style. The bank had a procedure in budgeting close to the priority-based approach. The
other case companies indicated they were applying an activity-based budgeting style.
In the Bank the VP Finance declared:
. . . the Budget is emphasised in the bank, and we are slowly evolving from the traditional
budget style as a more modern approach is implemented. Additionally related to capital
 budgeting, since investments are in the form of both tangible and intangible assets, financial Perceptions of
and non-financial methods are used in capital investment appraisals. Negative NPVs would
be accepted if the project proposal were really convincing, such as giving good market and managers
business analyses.
This may signal the opportunity for internal reporting to move from a narrow
accounting focus towards the greater use of narratives both internally as well as in
external reporting, as has been suggested from some sources (Mouritsen et al., 2001a; 539
Roslender and Fincham, 2004. From the evidence here however, it maybe only
beginning to emerge in the setting we have explored.

Capital budgeting
In terms of whether the level of IC within firms influences capital budgeting
approaches we find that firms with higher levels of IC attach greater importance to
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conventional financial capital budgeting approaches such as accounting rate of

return, payback, net present value, and internal rate of return. This was also found
in our four case companies. We have already observed that for high SIC firms there
is weak support for the fact that they are more likely to have capital investment
systems that capture the costs and benefits of intangibles. They are also more likely
to use a real options approach, and accept projects where the financial appraisal
does not support such action. Real options are particularly relevant to R&D projects
and strategic decisions where many of the benefits are long-term and hard to
quantify.
In the software company the financial manager, very honestly, confirmed that the
accounting and finance function needed to become better acquainted with some of the
concepts of IC:
The system is not there yet.
She conceded that even though formal non-financial or strategic appraisal of projects is
not really applied in the company, it does occasionally proceed with projects, which
show low or negative NPVs, for business reasons.
The accountant in the Broadcasting company repeated a similar message:
Investments of the company are both tangible and intangible, but there is no real system for
capturing the costs and benefits of the intangible investments.
Similarly, management at the bank declared:
The capital investment process is heavily financial and thus it does not easily capture the
intangible costs and benefits in any direct way.
There has long been the assertion that decisions are effectively taken well before the formal
approval stage, financial analysis being little more than a way of legitimizing decisions
which management had already taken (Bower, 1970; Aharoni, 1966). This may particularly
be the case with knowledge-driven firms where many of the costs and benefits cannot be
captured by conventional capital budgeting, investment being a matter of faith.

Economic exposure and business performance

Where firms have invested heavily in IC, such as in creative people, powerful brands,
strong customer relations, patents, or knowledge bases, they should be in a good
 AAAJ position to manage unanticipated economic events. We asked respondents to assess the
20,4 extent to which their organization was affected by economic or stock market
downturns. Table VI offers strong evidence that firms with high IC levels felt that they
were better able to cope with such events. Knowledge-driven firms are perceived to
have competences in their creative people, structures and external relationships that
act as a hedge against unanticipated economic change, forming an important element
540 of the corporate risk management strategy. If this were the case, we would expect to
find that high IC firms enjoy a lower cost of capital.
Our findings suggest that firms that manage their IC are better able to respond to
unanticipated economic and market change. Managers interviewed support this
argument:
The business is risky as it depends highly on airtime sale. When there is an economic
downturn, airtime sale also falls. The company is a little fortunate as IC hedges against
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economic uncertainties and ensures its long-term survival. This is because besides airtime it
also has movies and documentaries that can be sold in the form of CDs and TV programmes
to some foreign countries (broadcasting company).
The bank’s IC (such as its public reputation) will be a hedge against economic change and
market uncertainties as well as to ensure its long-term survival (bank).
In the manufacturing-company the supply-chain director declared:
Our strong brands and trademarks also act as a hedge against market economic
uncertainties.

Importance of: HIC SIC RIC Variables loading

Economic exposure
Ability to respond to economic 0.421 * * 0.540 * * 0.496 * * Managers’ and staff’s creativity
uncertainties and innovation ensure firm’s
long-term survival, IC acts as
hedge against unanticipated
economic change
Stock market influence 2 0.019 0.017 0.096 Will not be hit badly by fall in
the stock market, will not
over-react to fall in stock market
Corporate performance
Financial performance indicators 0.056 0.121 0.171 * After-tax return on assets,
after-tax return on sales, profit
growth, sales growth, profit,
share prices
Non-financial performance 0.417 * * 0.444 * * 0.480 * * Industry leadership, future
indicators outlook, overall response to
competition, success rate in new
Table VI. product launches
Association between IC Overall business performance 0.346 * * 0.429 * * 0.467 * *
and business and success
performance and
contextual variables Notes: Significance levels: *=0.05, * *=0.01
 The marketing management agreed: Perceptions of
. . . We have sound and clearly understood strategies, brands that serve people’s basic needs managers
and aspirations and generate dependable cash flow. These are the essential elements,
together with a proud corporate reputation, which will enable us maintain momentum of our
Path to Growth.
However, while respondents recognised that IC helped combat uncertainty, they did 541
not agree that high IC firms were less susceptible to stock market falls or to investor
overreaction. Lev and Zarowin (1999) argument may hold among Malaysian firms; the
greater information asymmetry between investors and the board in high IC firms
means that there is greater scope for surprise resulting in greater stock market
volatility and stock price overreaction.
We next consider whether there is evidence suggesting that firms with higher IC are
perceived to achieve higher performance levels relevant to their sector than other firms.
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Regarding short-term financial performance the evidence for superior performance is

weak, only RIC showed significantly higher agreement level for high IC firms.
However, we find positive association for the IC variables with industry leadership,
future outlook, response to competition, successful new products, and overall business
performance. It is clear that respondents in high IC firms gave a significantly higher
performance rating than respondents in low IC firms. This further support for previous
work by Nonaka and Takeuchi (1995), Bontis (1998), Teese (2000) and Bröcheler et al.
(2004).
There is a strongly held perception by respondents that the level of IC is associated
with higher levels of overall business performance. This finding is supported by the IC
director of the software company, when he commented above on not just documenting
innovations, but on converting them to revenues, that is, commercialise them. The
findings bring out this challenge to accounting: management believe that IC enhances
business competitive and non-financial performance, but it has yet to show up clearly
in corporate financial performance or in the reaction of the stock market.

Conclusion
Intellectual capital resources are often context specific, idiosyncratic and
interconnected (Marr et al., 2004) so no perfect solution is possible. However,
managers of high IC companies need to be able to develop knowledge-based strategies,
communicate and demonstrate the “value relevance” of these strategies. Then through
a combination of financial and non-financial methods they should develop a
performance measurement framework and control system, which ensures these
strategies are realised. This paper has reported the perceptions of Malaysian
accountants and managers in their dealing with the measurement and management of
intellectual capital.
In the context of contemporary interest in accounting for intellectual capital and
greater academic emphasis on external reporting, this paper deals with research into
management accounting and IC. This work builds on our insights, often from case
studies, in relation to performance measurement, control and strategic decision-making
where characteristics of high IC are displayed. Relatively few surveys have been
reported on management accounting for intellectual capital. In this paper, we have
examined the question of whether the level and shape of intellectual capital within
 AAAJ firms influences management accounting. We have offered findings based on a survey
20,4 of large Malaysian firms, which showed that some respondents had high levels of IC
(appropriately analysed into human, structural and relational capital) but with some
significant variation amongst respondents. Our research suggests that the level of
investment in IC is associated with management accounting practices, business
performance, and the ability to respond to future events.
542 It has been shown that IC does influence some aspects of management accounting,
this particularly tends to involve the use of value-based and a mix of financial and
non-financial measures, rather than those with an exclusive profit focus. Established
performance measurement frameworks did not feature strongly in these companies.
Their control style contained a “business” rather than a budget emphasis, with some of
the re-forecasting and decentralised approach associated with the beyond-budgeting
model, especially in companies with high human capital.
There was evidence of the use of financial measures for capital budgeting and this
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may benefit from further enquiry into the extent to which this is for making or
legitimising decisions. There is limited evidence from practitioners of the use of a “real
options” approach to capital budgeting in spite of this being recommended in the
literature, such a situation is not peculiar to Malaysia or any developing country
however.
Respondents believe that high IC helped them cope with economic uncertainty but
they did not agree that they were less susceptible to stock market movement or
investor reaction.
One interesting issue that future research could address is how IC changes give rise
to MAP changes. For example, a longitudinal case study might usefully explore how in
a particular firm, experiencing increasing IC intensity, the accounting style or
performance measurement process evolved. For example, what are the instigators and
circumstances in IC terms, that affect a transition from a budget-constrained to a
business-focus or non-accounting accounting style?
Further work could be conducted to assess whether some firms have a better fit
between MAP and IC than others, and does this reflect in superior performance? The
research could also establish whether the associations between IC and performance are
supported by stock market performance based on secondary data sources. Rather than
using self reported performance as in our research.

Notes
1. The most popular form is Economic Value Added w developed by Stern Stewart and Co.
The Accounting Standards Boards (2005) Reporting Standard on Operating and Financial
Review offers a number of economic performance measures for reporting to members such
as return on capital employed, incremental returns on investment, economic profit type
measures and organic rates of growth and returns.
2. Partial validation of financial assessments was provided by testing selected responses
against secondary accounting performance data.
3. Comparison of means for key questions revealed that the additional 34 responses were not
significantly different to the main sample.
4. T-test (comparison of mean scores between groups) was made on the responses from the first
and second mailing to find out whether there was an element of bias in respect of the time
they were received. Based on the test, we conclude that there is no response bias for the data
 collected, as there is no statistically significant difference in the mean of the variables for the Perceptions of
two groups Inter-item correlation was employed to ensure validity and reliability of the data.
The estimation was based on the average correlation among items within a construct, which managers
is concerned with “internal consistency” (Nunnally, 1978). This reliability analysis was
conducted for all the measuring instruments in the questionnaire. In total, 11 of the
questionnaire items scored less than 0.3, the acceptable level for inter-item correlation. Two
of the items (the term “knowledge” is used rather than “intellectual capital”) and
(“Acceptance of negative NPV in capital investment appraisals”), were retained because they 543
represented additional domains of interest (Churchill, 1979). These items were then
separated from the original dimensions in which they were originally designed to be, the
other items were removed.
5. All the items that scored lower than 0.3 for inter-item correlation were discarded, Cronbach’s
alphas were then recomputed. The reliability improved, and the range was between 0.4645
and 0.9173. Even though two variables, i.e. “Profit and loss-based financial measurement”
and “Ability to withstand economic uncertainties” scored lower than 0.5 (Nunnally, 1978),
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their inter-item correlations were higher than 0.3. Therefore, the two variables were retained.
6. Alpha values over 0.6 were deemed to be acceptable for this exploratory study (Hair et al.,
1998). Inter-item correlation was also used for reliability testing. A correlation between 0.2
and 0.4 was deemed reliable (Pallant, 2001). Inter-item correlation was considered whenever
the alpha of a factor was lower than 0.6. Where a proposed scale item cross-loaded on more
than one factor, the factor of the highest factor loading was chosen. If an item loaded on the
wrong factor, it was dropped. Only items that loaded on their corresponding factors of 0.512
or greater were retained.

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Further reading
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Corresponding author
Mike Tayles can be contacted at: m.e.tayles@hull.ac.uk

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