Cost Effectiveness

Information is like other commodities in that it must be worth more then the cost of providing it to consumers.  This concept is referred to as cost effectiveness.  Too often government regulators and others assume that information is “free” good.  Obviously, it is not, and the relationship between costs and benefits must always be kept in mind when selecting or requiring reporting alternatives.  To illustrate, in the early 1970’s the Federal Trade Commission proposed that large companies be required to disclose information about lines of business.  A group of companies brought court action to prohibit information about lines of business.  A major argument of the companies was that the information would be very costly to prepare, because it was not normally generated by the accounting system.  The companies also argued that the line of business disclosures in the form proposed by the FTC would not be beneficial to users, because the reported segments would be artificial and not those the companies normally used to report on a less than company wide basis.  Although the FTC prevailed, primarily because of perceived benefits in regulating anti-trust situations, this case underscores an important point – the cost of producing information, including, for example, modifications to the existing accounting system, or even, additional printing and mailing costs must be compared to the extra benefits generally meaning an improvement in specific decisions of users to determine if the information should be presented.

The difficulty in assessing cost effectiveness is that the costs and benefits, especially the benefits, are not always evident or easily measured.  Notwithstanding this difficulty, cost effectiveness is an important constraint and should be considered when selecting reporting alternatives.