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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

Will Financial Liberalisation Trigger a Crisis in China?

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The People’s Republic of China (PRC) has been liberalizing its financial system for nearly 4 decades. While it now has a comprehensive financial system with a large number of financial institutions and large financial assets, its financial policies are still highly repressive. These repressive financial policies are now a major hindrance to the PRC’s economic growth.

The PRC is at the beginning of a new wave of financial liberalization that is necessary for supporting the country’s strong economic growth. The country’s leaders have already unveiled a comprehensive program of financial reform, which includes 11 specific reform measures in three broad areas: creating a level-playing field (such as allowing private banks and developing inclusive finance), freeing the market mechanism (such as reforming interest rate and exchange rate regimes and achieving capital account convertibility), and improving regulation.

But could financial liberalization lead to a major financial crisis in the PRC? What would be the consequences for financial stability as the PRC moves to further liberalize its financial system? If the PRC repeats the painful experiences of Mexico, Indonesia, and Thailand, then it might not be able to achieve its original goal of overcoming the middle-income trap.

International experiences of financial liberalization, especially those of middle-income economies, should offer important lessons for the PRC. In our new research, based on cross-country data analysis, we find that financial liberalization, in general, reduces, not increases, financial instability. This powerful conclusion is valid whether financial instability is measured by crisis occurrence or by fragility indicators, such as impaired loans and net charge-offs. The only exception is that financial liberalization does not appear to significantly lower the probability of systemic banking crises, although it does lower the risk indicators for banks. These results have higher statistical significance and are greater in magnitude for the middle-income group than for the entire sample.

The insignificant impact on banking crises, however, should be interpreted with caution. One of the possible explanations is that under the repressed financial regime, the government supports banks with an implicit or explicit blanket guarantee. This reduces the probability of an explicit banking crisis, although the banking risks may be even greater because of the moral hazard problem. In fact, government protection of banks could also increase the probability of a sovereign debt crisis or even a currency crisis before financial liberalization.

If financial liberalization significantly reduces the likelihood of financial crises, especially in middle-income economies, then why did some middle-income economies experience financial crises following liberalization? We further investigate whether the pace of liberalization, the supervisory structure, and the institutional environment matter for outcomes of financial liberalization.

We obtain three main findings. First, an excessively rapid pace of financial liberalization may increase financial risks. The net impact on financial instability depends on the relative importance of the “liberalization effect” and the “pace effect.” In essence, what the “pace effect” captures could simply be the prerequisite conditions and reform sequencing that are well discussed in the literature. Second, the quality of institutions, such as investor protection and law and order, also matter. International experiences indicate that investor protection can significantly reduce the probability of financial crises. Third, the central bank’s participation in financial regulation is helpful for reducing financial risks during financial liberalization. This is probably because central banks always play central roles in financial liberalization, especially in the liberalization of interest rates, exchange rates, and the capital account. If a central bank is responsible for financial regulation, its liberalization policies might be more cautious and prudent.

Our research findings offer important policy implications for the PRC. (1) Further financial liberalization is necessary not only for sustaining strong economic growth but also for containing or reducing financial risks. (2) Gradual reform may still work better than the “big bang” approach, and sequencing is very important for avoiding the painful financial volatilities that many other middle-income countries have seen. (3) The government should also focus more on improving the quality of other institutions, especially market discipline, to contain financial risks. (4) It is better for the central bank to participate in financial regulation. The new regulatory system should focus exclusively on financial stability and shift from regulating institutions toward regulating functions. It should also become relatively independent to increase accountability.

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About the Author 

This submitted article was written by  and  of Asia Pathways, the blog of The Asian Development Bank Institute was established in 1997 in Tokyo, Japan, to help build capacity, skills, and knowledge related to poverty reduction and other areas that support long-term growth and competitiveness in developing economies in the Asia-Pacific region.

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Entrepreneurship

Understanding Cryptic Startup Terms

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The startup world throws around a lot of jargon.

Some of it is fluff, some of it is important.

Rather than pretend like you know what people are talking about, I’ve found it’s good to make sure I actually understand the terminology.

So, here’s a few essential startup terms you should know.

KPI

Stands for Key Performance Indicator. This is a measurable value that indicates how effectively your company or product is achieving its business goals.

Example: I would guess a main KPI of AirBnB is guests per night (how many people are staying on an AirBnB property on any given night).

The idea is that you can focus on improving key indicators, which should then directly influence your company’s goals.

Churn Rate

Your churn rate is the percentage of customers who stop subscribing to your service in a given time period. You can calculate the churn of anything (like revenue or employees), but it’s most often referring to customers.

This is considered the main enemy of any subscription company.

Example: As of this writing, Buffer’s monthly user churn is 5.9%.

Your acceptable churn rate depends entirely on your specific industry and company.

OKR

Stands for Objectives & Key Results. This is a framework for setting, communicating, and monitoring goals.

Objectives are goals, which tell you where to go. Each objective has key results, which indicate how you’ll get there.

Example:

Objective: Increase our recurring revenue.

Key Results:

  • Share of monthly subscriptions increased to 85%.
  • Average subscription size of at least $295 per month.
  • Reduce churn to less than 1% per month.

More examples.

MRR

Stands for Monthly Recurring Revenue. This is income that a company an reliably anticipate every 30 days. MRR is intended for products or services that have a defined price and recurring term.

Example: As of this writing, Treehouse’s MRR is $2M+.

To put two terms together, your MRR churn is the erosion of your monthly recurring revenue.

There is also ARR: Annual Recurring Revenue, not to be confused with Annual Run Rate (below) which even uses MRR in its calculation.

USP

Stands for Unique Selling Proposition. This refers to the unique factor of your company or product that sets you apart from all your competition. It’s the answer to the question, “Why should I do business with you instead of anyone else?”

Example: M&M’s “Melts in your mouth, not in your hand.” M&Ms use a patented hard sugar coating that keep chocolate from melting in your hands.

ARR

Stands for Annual Run Rate. This is a method used to project future revenue based on your current revenue. To get it, simply multiply your MRR by 12.

While that might seem inaccurate, ARR is a helpful tool to get an idea of long term growth and visualize the size of your business.

Example: If a company’s MRR for last month was $100k, its current ARR $1.2M.

Burn rate

Your burn rate is the rate at which your company spends money in excess of income. It’s a measure of negative cash flow. It is usually quoted in terms of cash spent (lost) per month.

Burn rate a good measuring stick for a company’s runway — the amount of time it has before it runs out of money.

Example: If a company has $1 million in the bank, makes $100k per month, and spends $200k per month, it has a burn rate of $100,000/month. It also has a runway of 10 months.

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About the Author

This article was written by Jordan Bowman. 

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