5 forces that are reshaping accounting | MIT Sloan

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For years, the accounting industry has been viewed as 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 bigger effect on the industry, accountants are taking on new roles in helping businesses track and report on 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 assess 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 long time, the purpose of a company was to provide returns for its equity and debt investors,” said Nemit Shroff, professor of accounting at MIT Sloan. “ESG says that a company’s purpose is broader than its investors alone – it’s the company as a whole. That means the measure has to reflect that in a way, and that’s a huge fundamental change. ”

The one constant in the midst of so many changes: knowing exactly what to measure will be essential for progress.

“Awards [for companies] are going to be more important in cases where you can measure the performance of the business, ”said Shroff.

Here are five areas in which accountants are meeting 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 the global flow of 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 phase out greenhouse gas emissions by 2050, investors took notice.

“Companies increasingly recognize that maximizing shareholder value is more than just profit,” said Chloe Xie, assistant professor of accounting at MIT Sloan. But since ESG measurement and reporting are not currently standardized in a balance sheet like profits are, this 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 part of it is because we tend to focus on what we can measure, and we can measure carbon emissions,” he said. Shroff said.

To this end, the creation in 2011 of the Sustainability Accounting Standards Board was intended to help by creating uniform standards that give accountants advice on how to translate risk into numbers. An alternative standard, the Climate-Related Financial Disclosures Working Group, has developed a framework to help SOEs accurately disclose their climate-related risks and opportunities.

Artificial intelligence and machine learning

Artificial intelligence is touted as a faster and 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 financial executives believe that more than half of the financial tasks currently managed by people could be performed by AI in the next three years.

Shroff predicted that “AI will significantly affect the way businesses detect fraud or any form of manipulation.”

Shroff especially sees AI having an impact when companies prepare their financial statements and do an internal audit to make sure there are no instances 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 unintentional.”

“I think as the technology develops, I can see AI changing quite significantly the way record keeping, the bookkeeping part of the bookkeeping, is done,” he said. he declares.

Blockchain and cryptocurrencies

Cryptocurrency is gaining so much popularity with financial institutions that it may well form a whole new class of assets. In fact, the recent trading debut of a Bitcoin ETF was the second highest ever traded fund.

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 it, then the asset is depreciated and a company depreciates the asset. value. But if the value of an intangible asset increases, above what has been paid, the company is not allowed to re-evaluate the value of the asset.

Shroff said that 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 is “no different from investing in shares of another company.”

“There are separate accounting rules for this, which, at least in my opinion, more closely reflect what a crypto investment should be accounted for,” Shroff said.

Going forward, Shroff said it was essential to think about how best to account for cryptocurrency, given that it will “gain popularity” because “businesses want to branch out and own cryptocurrency in as part of their treasury “.

Regtech

In recent years, financial institutions have doubled their compliance-focused investments in technology (known as regtech). Twenty years ago, companies mainly hired financial experts and increased their audit spend when affected by a regulatory change to ensure they were in compliance with rules like Sarbanes-Oxley.

Today, however, technology is increasingly used to provide real-time monitoring and tracking of compliance with industry and securities regulations as the burden of compliance (and related fines increases). ) 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.

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“Banks face increased scrutiny, especially with respect to the amount of their capital, as well as a range of consumer financial protection issues,” said Andrew Sutherland, associate professor of accounting at MIT Sloan.

As such, regtech is booming. Sutherland notes in a forthcoming article that in 2019, U.S. public financial institutions spent nearly $ 10 billion on regtech investments, compared to just $ 2.2 billion on audits. Going forward, he added, spending on regtech is expected to increase by 40% per year.

In a brokerage setting, for example, “regulators want to see that you have enough capital and that you properly segregate client and business assets,” Sutherland said.

Regtech helps companies demonstrate that they maintain these controls, not only at the end of the quarter when they release 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.”

Intangible assets

Is it possible to put a price on Apple’s ecosystem or provide 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 mainly focuses on historical or book value, rather than values. current or market “.

But as the value of intangibles 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 an important 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 some of their most valuable assets,” Shroff said, noting that it is particularly the case of technology companies.

“When a business grows internally, it doesn’t have any value placed on it,” and its value is “hidden from the accountant,” Shroff said. “So that accounting does not become obsolete in a world dominated by technology, it is necessary to reconsider the way we think about intangibles, just like the way we think about climate and social issues. “

Read more: FinTech, explained


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