Articulation

Achieving clarity concerning the causalities shaping a firm’s experience of the environment and clarity with respect to the correct paths of forward movement requires that the firm generate explanations. To a much greater extent than is the practice for most firms, explanations should be articulated - they should be written in a coherent verbal form. Why?

Consider the concept of ‘articulation’ in financial accounting.  Elements of financial statements are of two different types, analogous to photographs and motion pictures. Assets, liabilities, and equity describe levels or amounts of resources or claims to resources at a moment in time.  All other elements describe the effects of transactions during intervals of time.  The latter mainly includes comprehensive income and its components – revenues, expenses, gains, and losses. The two categories are related in such a way that (1) assets, liabilities, and equity are changed by transactions, and (2) an increase or decrease in an asset cannot occur without a corresponding decrease or increase in another asset or a corresponding increase or decrease in a liability or equity.  

The written characterization of these interrelations is referred to as ‘articulation’.  Articulation in financial accounting ensures that the elements and relations reported in financial statements hang together correctly. The power of double-entry accounting lies precisely in this integrated wholeness, which attaches verisimilitude to a business entity's statements concerning its condition. The probability that an investor or lender will make a decision based on the true state of affairs concerning the company is enhanced by this methodology.  The required coherence of the elements in their interrelations ensures that oversights have not occurred, it exposes gaps or lapses if they exist, and it makes the statements efficiently reviewable by others.    

Articulation in accounting is a form of explanation. Written explanations in other settings have the same benefits. Translating explanations to written form enlarges clarity and exposes lapses in thinking.  By requiring assumptions and inferences to be made explicit, a written explanation imports valuable structure into an analysis.  This reduces uncertainty; it literally makes the conclusion of the analysis less contingent.  The step of casting an explanation into written form is a type of posterior evidence in the classic Bayesian sense. It increases the probability of a firm's acting on true beliefs and thereby makes more probable a firm's realization of the projected state of affairs motivating the analysis.