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Will Accountants become Obsolete?

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An anxious student recently appeared at my office door. He was considering not applying to the master’s of accounting program; a professor elsewhere in the business school had told him accountants would be obsolete within a matter of years.

My immediate reaction was to laugh, but I quickly stifled that impulse when I saw real concern on his face. I walked him through the fatal flaws of this conjecture, and I believe I successfully convinced him to continue his accounting studies.

Nevertheless, the incident got me thinking about the “audit of the future” — in particular, the role of the audit professional in a rapidly changing technological environment. This topic generates considerable attention, but discussions to date have been mostly high-level and aspirational. Big accounting firms and business journalists use common buzzwords: data analytics, big data and — the newest addition to the nomenclature — blockchain. No one seems to know when or how “blockchain” will change everything, but everyone is convinced it will. (A blockchain, for the uninitiated, is a decentralized database or distributed ledger that records “blocks,” or data records, across multiple computers, reducing the risk of tampering or hacking.)

Take this recent article from Accounting Today. A very credible panel assembled to discuss the audit of the future. Lots of blockchain and big data talk ensued. For example, three different roundtable participants mentioned that, in the future, instead of using sampling techniques, auditors would be able to test 100 percent of a data set. That’s a popular response to the question, “How will auditors use data analytics in the audit of the future?” However, an accountant with good auditing and analytic skills (i.e., judgment) will have to decide how to handle the many exceptions or outliers that will inevitably result from “100 percent of data” computer number-crunching (ironically, probably through the use of sampling).

I agree that continued advances in technology will change the audit process, as well as the skill sets required of future auditors. But that’s not anything new. One of Accounting Today’s roundtable experts stated that “auditors must embrace new technologies.” No argument there, but auditors have been doing that for a long time. When books and records were first converted to computers, accountants and auditors had to develop and test IT controls. Later, audit documentation was converted from paper to digital form. The process was difficult and ugly, but the transition was successfully made. And, since day one, auditors have used various forms of data analytics.

Technology always changes, and auditors adapt. Big data, data analytics and, yes, even blockchain are simply the latest changes.

So, what does the audit of the future look like, and what is the role of the accountant/auditor?

An audit is about providing confidence to shareholders and other stakeholders based on trust. Governmental and commercial requirements for assurance services on information critical to investor/stakeholder decision-making will not go away — and will expand. The fundamental elements of delivering that confidence include independence in fact, professional skepticism, sound judgment, and courage. Each is a human characteristic that must continually be taught and demonstrated by the experienced professionals who have gone before. These are the important things that will never change. So what will?

Sustainability

It’s the umbrella term for various components of information beyond historical financial information relevant to investors and other stakeholders. Also known as Environmental, Social and Governance (ESG) reporting, or the “triple bottom line” of 1) economic viability, 2) social responsibility, and 3) environmental responsibility.

Strategy reporting is encompassed by the concept. Sustainability might be the auditing profession’s huge growth opportunity in the future. Currently, sustainability reporting is voluntary in the U.S. and many other countries, but stakeholder demand is growing significantly. One high-profile organization, the forward-looking Sustainability Accounting Standards Board (SASB), has been rapidly developing and publishing sustainability accounting standards. (Note the similarity — FASB and SASB.) Although no regulator currently mandates adoption of specific sustainability accounting standards, the SASB is positioning itself to be the go-to standard-setter if mandatory reporting becomes a reality, something the right president and Congress could make happen quickly. Auditors will be ready and willing to provide assurance services on mandatory sustainability reporting. Big 4 accounting firms are already supporting the SASB with dollars and cooperation.

Valuation Services

As financial reporting standards move from historical cost basis accounting to fair value, demand for valuation services increases. The valuation profession continues to develop professional frameworks, standards, and credentialing processes. Valuation services are exercises in professional judgment. For example, purchase price allocation in an acquisition is a common valuation service well-suited to the accounting professional’s enhanced training and experience.

Non-GAAP Information

Companies increasingly complain that traditional generally accepted accounting principles do not properly reflect the true picture of their operating results, so they calculate and publish financial metrics not defined by GAAP. These metrics include various measures of performance, such as cash flow (EBITDA and adjusted EBIDA) and even “adjusted revenue.” Currently, auditors don’t provide assurance on non-GAAP metrics, but they will likely be required to do so in the future. Include other non-historical financial information, such as management discussion and analysis, and you have another high-growth practice area.

Accounting Advisory Services

Generally accepted accounting principles are getting more complex in response to a changing global business environment and the trend toward fair value reporting. Independent accounting firms play an expanding role in advising clients and non-clients on new standards (massive new standards on revenue recognition and leasing are prime examples).

Consulting

It’s the ultimate hot button auditing firm service. The giant firms have rebuilt their consulting practices at a high growth rate in the years following the chaos caused by watershed restrictions imposed under the Sarbanes-Oxley Act of 2002 (SARBOX). This high growth trend is likely to continue, representing huge opportunities for accountants now and in the future. The looming question is whether the profession’s regulator, the Public Company Accounting Oversight Board (PCAOB), will take further action to dismantle, or at least discourage, consulting by audit firms. A causal link between consulting for audit clients and audit failures in major accounting scandals in the years leading up to SARBOX is more inferred than directly proven. Notwithstanding the tenuous link, the inference was enough for SARBOX to include significant prohibitions on many consulting services previously provided to audit clients.

As a result, large firms turned their focus to providing new permitted consulting services to audit clients and all types of services to non-audit clients. Additional restrictions would likely be aimed at limiting public accounting practices to audit or audit- and tax-only practices (i.e., no consulting). However, such a major disruptive move by the PCAOB is unlikely, unless another series of audit failures opens the door to opportunistic restrictions. One argument for auditing firm consulting practices is that the firm’s relevant consulting expertise improves the quality of the audit practice. Consider cybersecurity, an area in which consulting expertise is increasingly needed by nearly all companies (and that represents a huge growth opportunity for auditors). It makes sense that the firm’s consulting-related cybersecurity expertise could improve the quality of an IT internal controls evaluation performed as part of an integrated audit.

The list of current and future value-added services by CPAs is long and growing. The global economy and the regulatory and business environments will continue to evolve, and the accounting and auditing industries will evolve in response; artificial intelligence and automation won’t make them obsolete but rather enhance their effectiveness. It’s an evolution, not a revolution.

For those pursuing careers in accounting and auditing, the future is big and exciting, and we can prepare you for it. What we need from you are the irreplaceable human characteristics of independence, judgment, professional skepticism and, most of all, the courage to do the right thing.

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About the Author 

This article was written by Jeff Johans of Texas Enterprise. Jeff Johanns is an accounting lecturer at the McCombs School of Business. He is a former U.S. Assurance Risk Management Leader at PricewaterhouseCoopers LLP and is a Certified Public Accountant licensed in Texas with more than 30 years of experience in public accounting and private industry.

Entrepreneurship

Can the Japanese foster Innovation?

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Loftwork Inc., FabCafe, MTRL have created a support program and open community, COURIER, which assists innovators that target the global market. A meetup and presentation based on the topic, “Which city has the most global business opportunities?” was held on recently. At the event, nine business leaders knowledgable of the various regions in Japan shared their expertise and challenges.

Thinking of new businesses, putting them into practice, and sharing those ideas—that is “COURIER”

On this day, together with FabCafe, which have opened 10 offices throughout the world, Loftwork Inc. announced the opening of its new hub for global business in Hong Kong. Furthermore, along with the opening of MTRL Hong Kong, Loftwork Inc. also announced the launch of an online platform, “Material Service (MTRL.com),” which connects material manufacturers with creators.

The launch of COURIER is closely linked to this type of activity. In the opening speech, Mitsuhiro Suwa of Loftwork, Inc. reflected on the history of Loftwork, Inc.—”We have supported the new businesses and innovation of companies, but as a matter of fact, we have not had many connections with startups,” explanining that “whether it be an entrepreneur or an intrapreneur, the situation of capital and human resources is the same even though the crowd to appeal to may differ. If both sides share their information and network and complement one another, there is an opportunity to create a synergy effect.”

If we can utilize FabCafe as a platform for startups which aim to expand in the global market, we can persuade executives and investors to expand their businesses and thus create more possibilities. Suwa explained how from this idea, COURIER, a community of businesses was born—a community that thinks of new ideas, puts them into practice and shares them.

Startups without a sense of purpose and preparation will only become lost

The holy ground of startups—Silicon Valley. CEO of consulting firm Pacific Sky Partners Zak Murase, while describing how “unfortunately, the Japanese do not have a presence in Silicon Valley,” provided the following analysis of why Silicon Valley is known as the holy ground of startups.

<The Reasons Why Silicon Valley is the Holy Ground of Startups>

1) Great Weather
The good weather creates a welcoming atmosphere to share new ideas and start new businesses.

2) World’s Top Ecosystem
There has been a continuous cycle of achievers of success breeding new achievers since the 1960’s.

Meanwhile, the prices in general are 2.5 times those of Tokyo. This is characteristic of Silicon Valley—labor costs and cost of living are high, which can make placing a development team in Silicon Valley unrealistic. Given this situation, do startups have a chance in Silicon Valley? Murase shared the following recent topics.

– Total capital invested is generally increasing
投資件数は減少傾向だが、投資総額は増加傾向にあり、スタートアップ1件あたりの投資金額が増えている。
– General decrease in investments into seed stage startups
Investors have been actively investing in seed stage startups which are performing well, showing how they are carefully selecting where they are investing.
– The influence of the “Big 5” is overwhelming
Even if startups are able to innovate, they are either acquired by the “Big 5,” Facebook, Amazon, Microsoft, Google and Apple, or are completely crushed.

With that said, what do the Japanese need in order to perform well in Silicon Valley? Murase finishes by highlighting the 3 points below.

<Preparing to Enter Silicon Valley>
1. Hold a clear sense of purpose
2. Prepare to settle down in Silicon Valley
3. Slowly create a reputation and build trust

The key to promotion is to connect with local media and local people

Next, CEO of Network Communications Corp., Naoko Okada explained the business situation in Washington D.C., where her business holds an office. She emphasized how the city provides a suitable environment for startups—there are many security startups, rate of growth of entrepreneurs is number one in the U.S., the restaurant industry is booming, the city is undertaking a project to become a smart city (Smarter DC Project), the local embassy and chambers of commerce give strong support.

As for her specialty in global P.R., she explains, “Business and P.R. are closely linked. Creating something that fits with the local market and conducting promotion and P.R. activities go hand-in-hand.” She continued, discussing how local media is the key to “bringing the desired information to those who want it,” especially in the context of local promotion of products and services. She claims, “It is important to connect with locals, members of the community, people of the embassy, people in media and local executives. In order to do this, startups must disclose themselves and send out information.”

Case study: What is the methodology behind bringing Japanese goods and services overseas?

Tomohiko Nihonyanagi of Loftwork, Inc. raised the example of the “MORE THAN PROJECT,” a project which has supported the overseas expansion into 21 countries for the production of the “JAPAN brand.” He emphasized, “Bringing products and services overseas means bringing products and services to local markets. If a business does not understand this, they cannot sell. It is important to understand which regions and markets to target, understand their lifestyles and the market trends.” He shared some specific ways to approach this issue.

<Approaches to overseas expansion>
1) Adequate understanding of the company’s products and services
2) Selecting a business partner
3) Researching local markets
4) Localization
5) Promotion within local markets

Likewise, Takuya Hotta, CEO of Culture Generation Japan Co., Ltd., described the case of how Tokyo Some-Komon was successfully arranged into a Muslim dress as a way of promoting traditional Japanese dyeing methods overseas. He provided an analysis of the keys to success.

<Reasons for Success in Local Distribution>
– Selecting a business partner
The most important thing is to match with a business partner who shares the same sense of direction and passion. Partnering with designers and distributors with existing markets can make success more likely.
– Understanding which parts to keep and which parts to change
Clearly understand constraints, costs and strengths of the company’s product.
– Conveying a philosophy
Always use the underlying passion as a base to make decisions. Do not lose your sense of purpose.

Go global with understanding of local markets and making the most of the expertise in your best team

The second section kicked off with a session by Masaru Ikeda, co-founder of THE BRIDGE and blogger. Ikeda manages a news media site for startups and knowledgable in the business situations of various countries. He points out, “Japanese startups tend to look to Asia first to expand their business, but given the level of maturity in society and infrastructure, as well as the economic conditions in these countries, many of them do not succeed.”

With this point in mind, Ikeda introduced some startup hubs (cities) that have attracted attention.

– Paris
After renovation of a railway depot, Paris became home of the world’s largest startup campus, “STARTION F.” The French president, a former investment banker, has shown his active support for startups. Paris is also well known for its richness in talent in the field of A.I..

– Tallinn
Methods of raising funds is becoming diverse. “Funderbeam,” or the use of blockchain-based technology to bring together investors and companies is extremely interesting.

– Helsinki
Birthplace of Nokia. Many hubs for research and development with major startup activity. Oulu is famous for its event where startups pitch in the frozen water of the Baltic Sea.

– Tel Aviv
Israel’s largest festival for startups, DLD Tel Aviv, is held every September. Tel Aviv has become one of the prominent startup hubs of the world.

It’s not about the “city,” but the “people” who are there

Next, Kelsey Stuart, in charge of international communication of FabCafe at Loftwork, Inc., describes how FabCafe has built a global network. She explains, “When we open a new FabCafe overseas, we don’t evaluate the ‘city,’ but we evaluate the ‘people’ who are there,” and raised the following points.

<Criteria for opening a new FabCafe overseas>
– Is there a vision for FabCafe?
– Is there past experience in digital fabrication cafes?
– Is there connection to the local creator community?
– Would FabCafe function as a creative platform?

Stuart adds, “FabCafe is not a franchise. In each country, the promoters within each region gather their resources, capital and community and manage the cafe.” She explained how FabCafe has expanded globally by gathering people who sympathize with their philosophy and share their values, ideas, brand, graphics and websites.

Short presentations by two globally expanding startups

Next, two startups that have gathered attention made presentations. With his vision of “Product for Peace,” CEO Radcliffe Takashi Onishi of the Babels inc. introduced his Q&O (Question and Opinion) service, “historie,” which provides various interpretations of society’s controversial topics. He explains, “From problems of history and international conflicts, the information out there only provides one side of the story. For this reason, society is full of people who only see things from one perspective, which can lead to conflict. As a solution, society needs a product that can line up different opinions from multiple perspectives.” Instead of a Q&A service that provides one best answer, the service collects opinions that cannot be found through a search engine or SNS and information that are not found on Wikipedia or textbooks. By making various opinions easily visible, the service aims to promote the evolution of the imagination that mankind seems to be losing.

On the other side, , CEO of DiGINEL Inc./DiGITAL ARTISAN Inc., represented a startup which offers technology services related to digital tools. As one of the new services they are preparing to launch, he introduced “OpenNail,” a nail chip service which fits each individual’s nail shape. The company created a process utilizing a 3D printer to allow creators and designers to participate in the nail design process. In the future, easily ordering a nailchip of choice on the Internet and smartphones will become a reality.

Global business leaders provide hints for startups that succeed

– Presence of the Japanese

Murase: The Japanese are well-known for their disappointing levels of English. Whereas in the U.S., people are taught to express their opinions from childhood, the Japanese believe in conformity and have a hard time being heard because they do not express themselves. In Silicon Valley, this is becoming an obstacle.

Ikeda: The Japanese try to appeal to the fact that their startup is “Japanese.” But what’s most important is what is left once that national identity is taken away.

Okada: Are the entrepreneurs being trained to properly promote themselves?

Murase: If you decide to go to Silicon Valley, you should thoroughly practice your elevator pitch. Of course, there are people who are not proficient in English but do well in Silicon Valley. Those are the people who have passion or have something unique and are able to speak with confidence. Even if their English is not perfect, their aura is what leads them to success. This is a skill, too.

– Setting up an office

Okada: Apart from problems regarding communication, it might not matter where you put an office.

Ikeda: Since SaaS and the Internet is so commonplace nowadays, it might not matter. In fact, there are many cases where a business is organized around people who are scattered throughout different locations. Expanding business by selecting cities based on their features and gathering expertise in various locations could even be a way to make better startups.

Murase: It’s not rare for startups to scatter their teams in Silicon Valley. Startups will be strong if they can create a “best team” while taking advantage of each region’s features.

– The most important thing in global expansion is “English and mindset”

Murase: English. It’s the most important thing.

Ikeda: English of course, and also a mindset. If you have lived in Japan for a few decades, what you see becomes the world to you. We can expand our possibilities just by conducting business with the awareness that there are many races and cultures in the world.

There are obstacles for the Japanese to lead the world in innovation. However, now that there are platforms out there to bring innovation to the world, the path in front of us is opening. Okada sent a powerful cheer to all of the startups that are looking to expand globally: “Japanese people, let’s get more active globally!”

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About the Author

This article was produced by Lotfwork. Through planning, production, and communication, Loftwork is a creative partner that will make business innovation a reality.see more.

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Knowledge

India’s War on Cash

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Late last year, India declared war on cash: It killed off 86 percent of its own currency.

More than 1.2 billion people lost their right to buy items like iPhones at the market with cash or — more darkly — hide income from the government.

As you might expect, chaos ensued. But amidst the hair-rending, there is reason to deliver hope to those wondering how to thrive in a cashless society. Because while it may be bad for the black market, it’s good news for entrepreneurs — and those who like to transact legally.

Virtually overnight, Prime Minister Narendra Modi announced a startling policy to demonetize 500 and 1000 rupee notes, the most common form of cash notes in the country. He put forward an extraordinary list of restrictions on how much new currency can be withdrawn daily and weekly from ATMs and banks, while monitoring large deposits into banks of old notes and also putting in rules to verify the authenticity of depositors and buyers. Needless to say, this was a shock to millions of people. India’s informal economy is massive, and 90 percent of all transactions are in cash.

Modi’s drastic action was designed to tackle monstrous and unbridled corruption in India, where less than 3 percent of Indians file taxes and only half pay any income tax. A “cash and carry” economy implies that businesses, in both the formal and informal sectors, do not pay sales tax or declare income. Real estate is among the worst offenders. These private transactions presumably carry the blessings of the political leaders and government officials, who possibly get a cut from the sales.

Harvard economist and Nobel Laureate Amartya Sen has criticized Modi’s assault on cash as draconian, calling it a despotic action that has struck at the root of an economy based on trust. He argues that economic development is fine irrespective of how it is achieved, giving credence to what some call the Asian Paradox, where high-levels of corruption are correlated with high economic growth.

This argument ignores something fundamental to economic development: ethics and moral judgment. Professor Sen uses the term “trust,” but trust isn’t innate. It comes as a result of fair and equitable actions, both within the government and throughout the economy. If individuals and businesses engage in legal economic activity and pay taxes, the government has more resources to invest in education, healthcare, and infrastructure, and this spurs economic development. Over time, it builds trust. Such a society also opens the door to innovation and entrepreneurship, an area in which India falls woefully behind the U.S. despite being rich in human capital.

When a majority of society is economically immoral, it hurts the people who want to conduct business ethically. India has abundant latent entrepreneurs with ideas, but they drop out from pursuing their dreams because they do not have the network, wherewithal, or the conviction to embrace unethical and immoral practices to get things done. As Peruvian economist Hernando de Soto has suggested, it is more expensive to be legal than to be illegal in many parts of the world. India is no exception.

Modi felt compelled to take drastic action because corruption in India had reached a point of no return. This includes the education and healthcare industries — the sectors that should be a beacon of trust and which provide fertile ground for fresh ideas and new enterprises.

There will be unavoidable pain, and I sympathize with my colleagues and family in India, but the pain will be short-lived and, for a better India, it will be successful. I envision a day when the clever, young innovators in my home country benefit from the same vibrant environment for new business creation that is available to my students here in Austin, Texas.

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About the Author

This article was written by Prabhudev Konana of Texas Enterprise. Prabhudev is the William H.Seay Centennial Professor in the McCombs School of Business at The University of Texas at Austin.

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