A Critical Analysis of the Economic Value Added Method

Abstract

This paper provides a critical analysis of the Economic Value Added (EVA) method. The paper critiques two articles published by Stern Stewart & Co.: Accounting is Broken, Here’s How to Fix It: A RADICAL MANIFESTO and The Capitalist Manifesto: The Transformation of the Corporation, Employee Capitalism. EVA has been hailed as an innovative value-facilitating technique since it tends to focus management’s attention on value-creating activities rather than on short-term gains. This much is appreciated, but Stern Stewart & Co., the main promoters of EVA, have gone on to trash the accountancy profession, an approach with which the author of this paper disagrees. Stern Stewart & Co. makes sweeping allegations against the practice of accounting without indicating which version of accounting they are against. In this paper, differences between the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are highlighted. In addition, this paper goes on to applaud Stern Stewart & Co. for their work on EVA, and discuss how EVA could be used to promote amicable working relationships between managers and employees.

Keywords: EVA, Stern Stewart, Management, Value, Accounting, FASB, IASB

JEL Classification: M49, P43