For years, the accounting industry has been considered a time-honored practice whose primary responsibility is to help businesses keep accurate and timely records of their finances.
But as a host of emerging technological and societal trends continue to have a greater effect on the industry, accountants are taking on new roles in helping companies track and report their finances.
Specifically, innovations such as artificial intelligence, cryptocurrencies, and regulatory technology (“regtech”) are changing the future of accounting. At the same time, practitioners are increasingly being asked to value intangibles such as a company’s brand, technology, human capital and culture.
And then there’s climate change – a challenge big enough to potentially alter the fundamental nature of the practice, as more companies begin to measure environmental, social and governance factors ( ESG).
“For a very long time, the purpose of a company was to provide returns to its equity and debt investors,” said accounting professor at MIT Sloan. “ESG says a company’s purpose goes beyond just its investors, it’s society as a whole. That means measurement has to somehow reflect that, and that’s a huge fundamental change.
The one constant amidst many changes: knowing exactly what to measure will be essential to progress.
“Awards [for companies] will be more important in cases where you can measure business performance,” Shroff said.
Here are five areas where accountants are rising to this challenge:
ESG and climate impact
More than ever, investors care about a company’s ESG performance and companies are under pressure to show the positive impact they are having. A report by Moody’s Investor Services showed that global flows to environmental, social and corporate governance concerns increased to $80.5 billion in the third quarter of 2020, up 14% from the previous quarter. And when BlackRock chief Larry Fink urged companies to eliminate greenhouse gas emissions by 2050, investors paid attention.
“Companies are increasingly recognizing that maximizing shareholder value involves more than just profits,” saidassistant professor of accounting at MIT Sloan. But since ESG measurement and reporting is not currently standardized on a balance sheet like earnings are, it remains “a new frontier for accounting”.
Many companies measure their environmental impact by focusing on their carbon emissions and the specific actions they take to reduce them, such as planting trees that will absorb carbon from the environment, Shroff said.
“Carbon emissions are a natural thing that people think about, and I think that’s partly because we tend to focus on what we can measure, and we can measure carbon emissions,” he said. said Shroff.
To that end, the 2011 creation of the Sustainability Accounting Standards Board was intended to help by creating uniform standards that give accountants guidance on how to translate risk into numbers. An alternative standard, the Task Force on Climate-Related Financial Disclosures, has developed a framework to help public companies accurately disclose their climate-related risks and opportunities.
Artificial intelligence and machine learning
Artificial intelligence is touted as a faster, more accurate way to analyze data, and research shows its growing prevalence in accounting. In fact, a recent Ernst & Young survey showed that 53% of finance leaders believe that more than half of finance tasks currently handled by people could be done by AI within the next three years.
Shroff predicted that “AI is going to significantly affect how companies detect fraud or any form of manipulation.”
Shroff particularly sees AI having an impact when companies prepare their financial statements and perform internal auditing to ensure there are no cases of fraud. AI can also transform the standard method of accounting to “help companies better reduce the risk of errors in financial reporting, whether intentional or not.”
“I think as the technology develops, I can see AI changing quite significantly the way record keeping, the accounting part of bookkeeping, is done,” he said.
Blockchain and cryptocurrencies
Cryptocurrency is gaining so much popularity with financial institutions that it may well form a whole new asset class. In fact, the recent debut of a Bitcoin ETF was the second highest fund ever traded.
Accounting for the value of a cryptocurrency can be tricky. Generally accepted accounting principles consider cryptocurrency to be an intangible asset calculated as such: if the value of an intangible asset is less than what a company paid for, the asset is depreciated and a company depreciates the value. But if the value of an intangible asset increases, beyond what has been paid for, the company is not allowed to write down the value of the asset.
Shroff said an easier way to account for a cryptocurrency — and one that is echoed by other industry watchers — is to treat a cryptocurrency investment as security. Shroff said that “these currencies have observable prices” and that for any public company investing in crypto, it’s “no different than investing in the stock of another company.”
“There are separate accounting rules for this, which, at least in my opinion, more reflect what a crypto investment should be accounted for,” Shroff said.
Going forward, Shroff said it’s essential to think about how best to account for cryptocurrency, given that it will “grow in popularity” as “businesses want to branch out and hold some cryptocurrency. as part of their treasury”.
In recent years, financial institutions have doubled their compliance-focused technology investments (known as regtech). Twenty years ago, companies mainly hired financial experts and increased their audit spend when impacted by regulatory change to ensure they were in compliance with rules such as Sarbanes-Oxley.
Today, however, technology is increasingly being used to provide real-time monitoring and tracking of compliance with industry and securities regulations as the burden of compliance (and associated fines) increases. . Regtech can also be used to detect disruptive events in global financial markets, anticipate price movements, identify blockchain fraud, generate tax reports, and much more.
“Banks are coming under increased scrutiny, particularly in terms of the amount of their capital, as well as a range of financial consumer protection issues,” he said.associate professor of accounting at MIT Sloan.
As such, regtech is booming. Sutherland notes in a new article that in 2019, US public financial institutions spent nearly $10 billion on regtech investments, compared to just $2.2 billion on auditing. Going forward, he added, spending on regtech is expected to increase by 40% per year.
As part of a brokerage, for example, “regulators want to see that you have enough capital and that you properly segregate client and company assets,” Sutherland said.
Regtech helps companies demonstrate that they maintain these controls, not just at the end of the quarter when they publish financial statements, but “every moment of the quarter,” he said. Regtech “really lends itself to better record keeping, better data management, and better reporting solutions.”
Is it possible to put a price on Apple’s ecosystem or find value for the data scientists who work at Tesla? If that sounds difficult, it’s because “intangible capital, by its very nature, is difficult to measure,” Xie said, noting that “accounting primarily focuses on historical or book value, rather than current or market values”.
But as the value of intangible assets continues to grow, be it human capital, technology, brand or culture, solutions must be found. It is important to consider intangible assets because they are so valuable that they can play a significant role in the long-term success or failure of a business.
“The biggest companies today are so knowledge-intensive that most of their assets are intangible, and I would say that’s probably one of their most valuable assets,” Shroff said, noting that it is especially the case with technology companies.
“When a company develops this internally, no value is assigned to it,” and its value is “hidden from the accountant,” Shroff said. “To ensure that accounting does not become obsolete in a technology-dominated world, it is necessary to reconsider the way we think about intangible assets, just like the way we think about climate and social issues.”
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