Walden University
SCHOOL OF MANAGEMENT
This is to certify that the doctoral dissertation by
Bryan L. Forsyth
has been found to be complete and satisfactory in all respects,
and that any and all revisions required by
the review committee have been made.
Review Committee
Dr. Lilburn Hoehn, Committee Chairperson,
Applied Management and Decision Sciences Faculty
Dr. David Metcalf, Committee Member,
Applied Management and Decision Sciences Faculty
Dr. Joseph Barbeau, Committee Member,
Applied Management and Decision Sciences Faculty
Provost
Denise DeZolt, Ph.D.
Walden University
2007
ABSTRACT
A Validation Study on the Intangibles Audit
by
Bryan Forsyth
A.A., LA Tech University, 1986
B.S., Southern Illinois University, 1990
M.A., Ottawa University, 1999
Dissertation Submitted in Partial Fulfillment
of the Requirements for the Degree of
Doctor of Philosophy
Applied Management and Decision Sciences
Walden University
August 2007

ABSTRACT
A tangible asset can be recognized and listed on the balance sheet. Alternatively,
intangible assets are non-physical items (e.g. patents, knowledge, competencies). The
problem is managers are not able to easily recognize and articulate the value of intangible
assets, including the value of knowledge management initiatives in their organizations.
The purpose of this research was to highlight the importance of evaluating intangible
assets. The research questions focused on the relationship between earnings and
intangible assets and the validity and reliability of an asset assessment instrument. Survey
research was used to gather data from a sample of 400 members of American Society for
Training and Development (ASTD). Statistical analyses included factor analysis,
Cronbach’s Alpha, and Pearson’s r. The results showed there is a direct correlation
between company earnings and the four supporting intangibles variables: strategies, core,
organizational, and leadership competencies. The asset assessment instrument was
demonstrated to have a high degree of reliability, but it should be used carefully because
of lower validity scores. One key recommendation is that managers should consider
disciplined methods to assess intangible assets because these variables contribute to
company earnings. From a positive social change perspective, an increased awareness of
the importance of intangible assets may help managers make appropriate investment
decisions regarding knowledge management and other organizational change initiatives
that could lead to further profitable growth and success of organizations.

A Validation Study on the Intangibles Audit
by
Bryan Forsyth
A.A., LA Tech University, 1986
B.S., Southern Illinois University, 1990
M.A., Ottawa University, 1999
Dissertation Submitted in Partial Fulfillment
of the Requirements for the Degree of
Doctor of Philosophy

Applied Management and Decision Sciences
Walden University
August 2007
UMI Number: 3262591
3262591
2007
UMI Microform
Copyright
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by ProQuest Information and Learning Company.
ii
TABLE OF CONTENTS
LIST OF TABLES……………………………………………………………………… iv
LIST OF FIGURES…………………………………………………………………… v
CHAPTER 1: INTRODUCTION TO THE PROBLEM 1
Introduction to the Study 1
Statement of the Problem 2
Background of the Problem 3
The Purpose of the Study 5
Theoretical Support for the Study 6
Assumptions 11
Scope and Delimitations 12
Limitations 12
Definition of Terms 12
Research Questions 13

Significance of the Study 14
Summary and Overview 15
CHAPTER 2: LITERATURE REVIEW 17
Introduction to the Literature Review 17
Defining Intangible Assets 18
Defining the Need for Valuation 22
Links between Systems Theory and Intangible Assets 25
Potential Tools or Methods for Measuring Value in Intangibles 27
Current Valuation and Implementation Methodologies 33
Summary 42
CHAPTER 3:METHODOLOGY 45
Introduction 45
Research Design and Approach 45
Population 46
Sampling Procedure 47
Sample 48
Instrumentation 48
Data Collection Procedures 51
Data Analysis 52
Measures to Protect the Participants 56
CHAPTER 4: RESULTS 58
Introduction 58
Data Generation 58
Results 59
Summary 66
CHAPTER 5: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS 68
iii
Summary 68
Conclusions 70
Recommendations for Practice 74

Recommendations for Future Study 77
Social Significance 79
Concluding Statement 80
REFERENCES 82
APPENDIX A: THE INTANGIBLES AUDIT (IA) 84
APPENDIX B: AUTHOR’S PERMISSION TO USE THE INTANGIBLES AUDIT 87
APPENDIX C: ELECTRONIC MAIL INTRODUCTION AND INVITATION TO
COMPLETE THE SURVEY INSTRUMENT 89
APPENDIX D: HUMAN CAPITAL SURVEY FOR THE TECH SECTOR 90
CURRICULUM VITAE 97
iv
LIST OF TABLES

1 Pearson r Correlation for the Intangible Audit Survey 60
2 Cronbach Alpha Reliability Analysis for the Intangible 62
Audit Survey
3 Factor Analysis Relating to the Validity of the Audit Questions 64
4 Pearson r Correlation Indicating Implied Importance of Variables 66
v
LIST OF FIGURES
Figure 1 Cronbach alpha scree plot relating to the validity of the
intangible audit 64
CHAPTER 1:
INTRODUCTION TO THE PROBLEM
Introduction to the Study
Liebowitz (1999) conducted a very exhaustive literature review and created an
excellent handbook for someone thinking about entering the intangible domain. At the
end of the chapters, there were areas recommended for further research, which will be
considered as partial justification for this work in conjunction with all of the other
evidence found and presented here.

Future work should focus on building practical experience through extensive
experimenting, prototyping, and testing—especially in the process, technology,
organizational, and implementation perspectives. In addition, the conceptual
frameworks and integration across KM [knowledge management] perspectives
need more investigation and development. Although considerable progress has
been achieved in KM across a broad front, much work remains to fully deliver the
business value that KM promises. (pp. 1-20)
The work proposed here will address some concerns that Liebowitz shared with his
readers. Specifically, he shared some questions that would warrant further empirical
research activity to minimize the likelihood that intangible assets continue to be
trivialized at the risk of the corporation. These questions included:
• To what degree are actual knowledge management projects consistent with the
strategies of firms and business units?
• How are firms justifying their knowledge management activities with regard to
competitive advantage issues?
• What specific measures of knowledge management and its relationship to
business performance have companies actually adopted, and what kinds of results
have they achieved? (Liebowitz, 1999, pp. 2-10)
In short, the Sveiby (1997), Stewart (2001), Sullivan (2000), Rumizen (2002), and
Clare and Detore (2000) generally agree that there is not currently a consistent model that
can be used to assess, track, and improve intangibles in organizations. There is also
2
agreement that there is no consistent framework for introducing valuation and
measurement into the process. Little empirical research has been done to demonstrate the
connection between the timing of the introduction of measures and the effects on the
overall implementation process. In fact, based on a survey done by the American
Productivity and Quality Center (APQC; Crager, J., 2002), there is evidence that
companies engaged in intangible practices are using some type of valuation and
measurement system, but these companies are still the minority. APQC is currently
undertaking just such a study to help practitioners understand the intricacies of valuation

and measurement and perhaps to create such a consistent framework.
Statement of the Problem
The problem in this study is that managers are not able to recognize and articulate
the value of intangible assets in their organizations. This situation can lead to decisions
being made without considering what investors and the market might consider as key
factors in the street value of a company. There has not been enough empirical research
done to provide managers with the necessary tools to aid them in making decisions with a
sense of certainty that they are doing what is right for them as well as their employees
and company. There has been limited validation of instruments such as the intangible
assets audit to demonstrate the linkage between variables such as earnings, strategy,
competencies, and organizational as well as leadership capabilities. If the topic of
intangible assets is as important as authors referenced in this study claim it to be then it
would follow that more scientific inquiry is needed to illustrate what tools might be valid
and therefore more useful in decision making related to this part of a business.
3
Background of the Problem
Ulrich and Smallwood (2003) proposed the definition of intangibles to be “…the
value of a company not accounted for by current earnings” (p. 6). This is commonly
known as the market value in today’s business world. The authors further stated that
“companies with high intangible value have higher P/E [price to earning ratio] multiples
than their competitors, and like coaches of successful teams, their leaders have earned the
perception that they can be trusted to deliver on their promises about the future” (p. 6).
The accountants that try to determine the worth of a company that is being sold usually
come up with a number that differs from what the true value is when the company is
actually sold. This is because accountants do not typically include the value of intangible
assets. Some of the more savvy investors will inquire deeper into the fabric of the
companies operations and management practices before offering to buy. The firm’s
market value is a combination of the “stock price times shares outstanding” (p. 6). This
stock price may often be many times the value of the tangible assets and in the past has
been labeled goodwill when the company was sold. Many of the leading thinkers such as

Ulrich and Smallwood are making the case for this goodwill to be more defined as the
way companies perceived value changes in today’s market. Furthering this position and
making this case more empirical is the aim of this research.
Clare and Detore (2000) argued that current investments related to managing
knowledge and intangibles is very large, perhaps in the range of billions of dollars. KM
could turn out to be as important to organizations, if not more so, than process
reengineering or other improvement programs that have been widely discussed. There
could also be a danger of another management fad. Unless methods are developed and
4
utilized that would get and keep the attention of the top decision makers of an
organization, KM could easily fall victim to the same fate many other similar movements
have in the fields of human resources and organizational development. Many corporate
dollars can be wasted leading to more frustration and more of a loss of credibility with
top decision makers. Clare and Detore (2000) stated that
the opportunity to use knowledge management to achieve competitive advantage
is very real. The KM valuation methodology is a rigorous financial framework for
analyzing the costs, benefits, and risks associated with investing in the knowledge
assets of an organization. (p. 7)
The purpose in creating an evaluation methodology was to assist decision makers
at all levels in the organization in making calculated risks and educated choices around
KM proposals. Some of the areas that are viewed as typical KM projects or strategies
currently being pursued by major organizations are best practice gathering and utilization,
competitive intelligence functions, establishing roles and duties for top level leaders
around KM, buying or designing software applications to be used as infrastructures or
knowledge repositories, building corporate libraries and universities, identifying and
commercializing knowledge as rapidly as possible, deliberately having post action
reviews to discover what has been learned that could be reused in the future, and creating
portals that would allow for one location to search for any and all information or data the
organization has available. Clare and Detore (2000) posited that these many differing
types of KM projects and strategies do, in fact, have some similar themes. They

suggested that these themes “are designed to create and/or leverage the knowledge assets
of the firm, involve significant costs and subtle risks, and promise significant, but often
hard to measure or intangible benefits” (p. 8).
5
Therefore, Clare and Detore (2000) concluded that there is a compelling case for
the newly created field of KM and very real difficulties associated with measuring and
creating value around intangible assets. Given this, with all the competing proposals for
corporate investment of capital, why should a KM proposal get the funding to continue to
exist? These are some deficit areas that have been posed in the literature that have enticed
this researcher to further investigate useful instruments and tools that might help
managers make better decisions in regards to their intangible assets.
The Purpose of the Study
The purpose of this study is to gain further understanding of how companies are
currently valued in the market place and how that viewpoint might need to be adjusted or
altered to reflect a new more current reality. Tools and instruments that have been
developed and utilized to date will be examined and one tool in particular has been
analyzed in an attempt to help manager’s gain a deeper understanding of what is
important to building their company’s market value and might offer a somewhat different
means of gathering data in order to make informed decisions. Validation of the
instrument in question has been done to the degree possible within the parameters of the
study. Ultimately, this study has been designed to be used as a practical means of gaining
understanding of the concept of maximizing market value by maximizing intangible
assets. The application of these concepts would be possible by using the instrument to be
validated during the course of this study.
This research is aimed at helping the reader understand how the valuation of
intangible assets has progressed over the years and how intangible calculations have
become more of a key factor in the market value of a company and to increase
6
understanding of a tool that could aid manager’s in getting a better picture of intangible
value and help lead them toward solutions about how to maximize value. All of this

should lead to more enhanced decision making that includes areas closely related to
increasing market value of the company in question.
Theoretical Support for the Study
Clare and Detore (2000) described a theory of business knowledge or
epistemology and claimed this theory would be an essential place to begin the intangible
discussion in any organization. Many practitioners avoid theory at the expense of the
creation of an architecture that could be critical in building the valuation model necessary
to convince decision makers of the real value of intangible assets. This omission is one of
many noted in the literature that have led to failures in implementing these types of
programs.
The business theory or epistemology should contain at least five essential
elements, which are a model of knowledge, a relationship to information, a link to
economic value, a cognitive process, and, the defined role of technology. In order to
define further the business knowledge that is part of the valuation process, a practitioner
would first create a model that would have formal and testable descriptions of knowledge
utilized in the organization. In the literature, theorists have identified and labeled many
types of knowledge such as tacit and explicit, procedural, meta, and situational. Second,
the clarity of the relationship to information would help to distinguish between
knowledge, information and data. These distinctions are important for categorizing items
and assigning responsibility properly. For instance, purely explicit information or data
management might best be addressed through an information technology
7
(IT)/management group, or perhaps the human resources group depending on the content
or context; whereas, a knowledge engineer or someone else who truly understands KM
might best address the retrieval and storage of tacit knowledge. The third element would
involve a link to economic value. Asking questions such as, how could our knowledge
foster sound decision-making or innovation? How do these knowledge factors impact the
income statement or balance sheet? The fourth element would involve the practitioner
ascertaining how both individual and group knowledge is cognized. Questions leading to
these answers might include how do individuals or groups get creative, learn

experientially, typically solve problems and collaborate? What are the current norms and
patterns that need to be enhanced or altered, or just left alone? The fifth and last element
is the technology factor. Here one could ask what role technology will play in this
architecture. There is danger that the technology aspect of the architecture could
dominate the program and that potential problem would need to be addressed. If
technology is to be a dominant component of the program, then let it be by design and for
a purpose. If technology is to be central to the success of the project, then perhaps the IT
group should lead the effort.
Just as we need a mission and business model to guide strategic thought about our
corporations, we need a business epistemology to guide strategic decisions about
how to manage knowledge in our corporations. (Clare and Detore, 2000, p. 18)
Clare and Detore (2000) theorized that in order for knowledge to be categorized
as an asset, it would need to have three distinguishing factors, which were content,
structure and reasoning. The content is data or information in its purest form before the
real value has been added by human interaction and utilization. Once there is the
presence of some content, the data or information would need to have some structure
8
such as a hierarchy or some scheme or categorization, which would create logic and
understanding for others engaged in the usage of this data/information. The reasoning
component is the active cognitive process that the human factor would necessarily add to
the data/information in order to create required value. Sound problem solving or
decision-making by the user creates this value. Individuals or groups, to varying degrees
of success, can accomplish this reasoning element. This success would largely depend on
the intentional design of a structured architecture along with the understanding of the
users in how to create value.
In order to further define their theory of intangible asset valuation, Clare and
Detore (2000) reviewed some of the literature on systems theory and attempted to create
a link between constructs such as core competencies, value constellations, and mental
models in order to advance Knowledge and Organizational Learning Management (K &
OLM) in organizational systems. The fundamental way in which organizational systems

have been required to organize and perform as of late have been changing at a
phenomenal rate unlike any other in history. Mergers and acquisitions, downsizing,
critical skill shortages in our culture, globalization, and a host of other factors are
impacting the way in which systems are required to evolve. If, in fact, the requirements to
be a successful competitor in the global economy include creating and sustaining a
culture of innovation, quality, and continuous improvement, then it is also logical to
assume that the argument could be made for investment in K&OLM. Knowledge and its
relationship to changes in organizational systems could be summed up as follows:
Knowledge is a key factor of production in every industry and is the scarcest
resource around which the business firm competes. Innovations in communication
and coordination technologies are causing a shift in the relative transaction cost
advantage of firms causing an explosion of innovation in the shape and structure
9
of the modern firm as it reconfigures to increase the value created by knowledge
and to learn faster than competitors. (Clare and Detore, 2000, p. 92)
The definition of a system that Clare and Detore used was “any collection of
components that through a set of relationships operate together to perform some overall
function or achieve a purpose.” (p. 94). The basic elements of any system are viewed as
components or a set of variables that are being considered as critical for the functioning
of the system as a whole. The distinction of a component is that it cannot be broken down
into any lesser element. If we were discussing human systems then the component would
be the functioning systems within the individual. Other forms of components would
consist of capital, information or materials. The relationships that exist among
components are varied and instrumental in the actual shape and effectiveness as well as
efficiency of the system.
The two most common systems structures are known as hierarchies and networks.
The hierarchy has a more formal structure and is designed to facilitate interaction
between levels and to create a sense of authority and power. The network is an open
system where components (in this case, the individuals) are free to go in any direction
they choose to get what ever it is they need or want without fear of repercussion. Every

business organization on any scale has both types of systems. Each system has its own
merits and the challenge presented is to design an architecture that could maximize the
benefits offered by each system. Feedback is another element of a system and could be
viewed as output from a component of the system coming back into the system as input.
There is circular activity between the output, input and the corresponding environment.
Diagrams would be created called causal loops that could take shape in one of two ways.
Clare and Detore (2000) described these two loops as vicious cycles, where negative self-
10
reinforcing outcomes are the norm, or virtuous circles, where positive self-reinforcing
outcomes are common. The loops could be utilized in the process of managing
knowledge assets. Whether these loops are positive or negative would likely be a direct
result of the alignment of the people (components) and the type of system they exist in.
Achieving alignment means designing and implementing components that have
complementary functions that service the purpose of the system as a whole. It
means wiring inputs, states, and outputs together across subsystems to create
system-wide interdependence that gives rise to the structure and behavior that is
required for high performance in the operating environment. Achieving alignment
means leveraging the unique properties of individual components without
allowing them to dominate and thereby sub optimize the overall functioning of the
system. (Clare and Detore, 2000, p. 104)
K&OLM and systems alignment are complementary and work toward the same
end. The connections between K&OLM and systems theory become more evident as one
discovers more about the two topics. If there is an understanding of what the organization
knows and how this knowledge can be utilized to achieve greater speed to market and
customer satisfaction as well as being able to increase the speed of knowledge
acquisition, then the system is likely to function at high levels in a competitive business
environment. The business epistemology holds the keys to success in linking the
elements of the system and the creation of subsequent value in relation to the economics
of the firm. Clare and Detore (2000) posited that
the knowledge architecture, one of the chief components of knowledge

management, seeks to achieve alignment on a large scale and establish economies
of knowledge, transaction costs advantage, and rapid learning. Finally, for an
organization whose primary assets and offerings are intangible, knowledge
management is the chief means of creating strategic alignment. This is true
because in such firms, knowledge assets dominate the organizational architecture.
(p. 108)
11
Other theorists in search of new methods to measure noneconomic goals have
devised measurement systems. The works of Sveiby (1997), Stewart (2001), Sullivan
(2000), and Kaplan and Norton (1996) are all related to the question of how to begin
defining new methods of measurement and valuation in the Third Wave. The work done
here is another logical extension of that need for a different means of measuring the non-
economic intangible assets of the corporation.
Assumptions
One assumption made for this study was that participants completing the survey
had an understanding of what kind of progress their company would have made over a
certain length of time in relation to growing in market value. It was also assumed that
survey participants understood the type of Human Resources Development (HRD)
programs currently being implemented in their organizations. This author assumed that
each manager asked to complete the survey functioned in an environment where there is
healthy communication and understanding of current events and the overall fiscal health
as it changes over the quarters. If this were not the case, the results would likely come out
the same as this type of environment presumably would not create the type of market
value as others where managers are well informed. This would likely further validate the
instrument.
According to Ulrich and Smallwood (2003) there are some key assumptions that
this premise of intangibles rests on and they are:
1. Intangibles determine an increasingly sizable portion of a firm’s market value.
2. Intangibles are not random; they can and should be managed.
3. Intangibles are the responsibility of leadership at all levels of an organization.

A CEO worries about intangibles as they affect the entire firm; a vice president
focuses on intangibles within a more limited domain of influence; a first-line
supervisor emphasizes the intangibles within the work team.
12
4. Intangibles can be increased by applying a set of management tools and
disciplines.
5. Intangibles occur at hierarchical levels. Without the higher-level intangibles in
place, the underling intangibles will not add value (p. 21).
Scope and Delimitations
These study participants consisted of professional business people. Participants in
this study were typically older, more mature, have highly evolved work skills and various
amounts of experience in the work place. The participants were members in an
organization known as the American Society of Training and Development (ASTD).
They are typically full-time workers who are colleagues in the field this study impacts
most. The average age is 30to 45 years old. Using the qualifying criteria, the researcher
gathered data meaningful and applicable to the research questions in this study.
Limitations
The data would not be generalizable beyond the participants of the study due to
the limitations of the instrument itself. The instrument must be changed to be more valid
and then further research can occur at which point more generalization is possible.
Another limitation involved participants that were too busy to complete the instrument.
Many of these people are limited on time and too interested in other things to spend any
time on participating in research. This issue was overcome by sending the survey to a
large population base.
Definition of Terms
Knowledge: For the purposes of this study, knowledge was considered tacit or
explicit. Explicit knowledge was defined as all written documents (books, papers,
manuals) or information found in computer systems (software, saved documents, network
drives, etc.) that when applied in unique individual ways on the job create added value
13

for the company. Tacit knowledge which involves expertise and knowledge of an
organization’s key workers is of value if applied to solve problems that make the
organization more productive in some way.
Management: The management element was the determining factor as to whether
or not the employees were granted the latitude to participate in the gathering, creation,
documenting, and usage of this information and knowledge in such a way that would, in
time, bring about system wide efficiencies.
Intangible Assets: Ulrich and Underwood (2003) proposed the definition of
intangibles to be “…the value of a company not accounted for by current earnings” (p. 6).
This is commonly known as the market value in today’s business world. Throughout this
research, the reader will see the terms KM and intangible assets used interchangeably.
KM is actually a subordinate term but might have a specific application to that segment
of the work.
Research Questions
Research Question #1: What is the relationship between company earnings and
the company’s current strategies to include core competencies, organizational
capabilities, and leadership capabilities as measured by the participant responses? The
hypothesis would be that there is a positive correlation between the implementation of
HRD programs and the value of intangible assets. The Pearson correlation was used to
answer this question and support or refute the hypothesis. The hypothesis was that there
was a positive relationship between the company’s earnings and the company’s current
strategy, core competencies, organizational capabilities, and leadership capabilities.
14
Research Question #2: To what degree is the Intangible Assets instrument valid
and reliable? The hypothesis is that the instrument is valid and reliable. Pearson r,
Cronbach’s alpha and exploratory factor analysis will be used to support or refute this
hypothesis.
Research Question #3: As a result of this research, what is the rank order of
importance for these variables that might allow for the acceleration towards an increase
of results in relation to market value? The hypothesis in this case would state that

managers decision making would be more enhanced leading to measureable
improvements in the value of intangible assets in a shorter period of time.
Significance of the Study
This research could benefit managers of companies large and small to make better
and more informed decisions based on assets that have gone previously unseen or not
properly recognized in a formal way. It could help managers by making the
invisible/intangible assets visible and illustrating a correlation between the current market
value of the company and the problem areas that need to be improved to create the
desired value as seen by the marketplace.
The social significance of this study could be the positive impact that this new
found awareness could have on managerial decisions that favor employees and their
growth and development. This growth and development would ideally lead to higher
levels of satisfaction by employee groups and increased motivation which in turn would
lead to higher productivity and more market value related to intangible assets. This whole
process would ideally lead to a cycle of upward momentum that would continue to
increase market value, job satisfaction, and retention of key employees. All of this is
15
good for people who work for these companies and the economy as a whole. The field is
in desperate need of empirical research and this study could contribute to a significant
increase in the knowledge of this particular aspect of intangible assets
The design of this study allows for replication with other similar intangible assets
programs under similar circumstances. The study could be used to educate people on how
to implement such an audit program successfully, and could potentially save many people
and companies a lot of time and money by avoiding failure in managing their intangible
assets properly.
The tools being validated in this study are original based on the literature review
and have led to new discoveries and applications in this field so lacking in empirical
work. This study could be used to further enhance empirical studies done by students at
Walden University and other like institutions.
Summary and Overview

In chapter 1, the relationship between intangible assets and KM was presented.
This researcher also identified some key areas where there are gaps in the literature which
might be used to justify this study. In addition, some research questions were identified
that would prove instrumental in guiding the literature review and hence the rest of the
study. The following literature review serves to help the reader gain a deeper
understanding of why this issue exists and why it is a problem worthy of study. In chapter
2 the literature review consists of viewpoints from different authors related to intangible
assets. The ranges of views extend from empirical to anecdotal and the suggested
methodologies range from very much accounting based to very qualitative as in
observations and interviews. In chapter 3 of this dissertation, a methodology is presented