A week ago I attended a CPE seminar on the topic ‘Adding Value to Audit Work’. As might be expected, it developed the basic premise of the English ICA’s document, ‘Chartered Accountants in 2005’.
It would seem that we are all doomed, unless we can claw our way into the overcrowded and precarious market for ‘consultancy’ and general guru-dom. But I reflected that this doomsday scenario shared the conventional wisdom that all further technological development can only be more of the same, and so make things worse. This is not necessarily, or even likely, to be true of the future of accounting technology.
Many years ago, I came across what seemed to be a substantial fraud at a new bakery client: the inventory valuation had been blatantly manipulated. When I tackled the chief executive about this, all he said was:
‘Let me tell you how we do the accounts here. I know what the profit for the period has been, so I tell the accountant to prepare the accounts from the nominal ledger, put that profit figure in as the bottom line, and adjust the inventory accordingly’.
‘But you can’t do it like that,’ I maintained.
‘Everybody does it,’ came the reply. ‘You see, my figure is right; if we did it the way you accountants want it done, it would be wrong.’
‘How do you know what the profit for the period was, if you didn’t get it out of some sort of accounting records, even if they’re not the official books-of-account?’ I asked.
‘I just watch how the dough is flowing through the plant,’ says the chief executive.
‘Just supposing you were right,’ I said, ‘why do you think the accounting result has to be wrong?’
‘Because your provisions for maintenance, depreciation, advertising and things like that are hopelessly crude from a technological point of view,’ came his dismissive reply.
As time went by, I moved into another line of work, and encountered cognitive psychologists, and the concept of human expertise: surgeons do not search their memories for the content of anatomy textbooks, but operate on auto-pilot, so to speak. This kind of expertise also operates in the commercial sector.
An expert should have a more sophisticated cost model than can be captured in a transaction-based accounting system. Although the expertise of people such as my bakery director is based on their historical experience (in the widest sense), so that they can make statements such as: ‘The plant grossed #142,500 last month’, it is really a future-oriented replacement-costed view of the world.
The question of whether he was right in making so precise and detailed an assessment depends on how good he was at his chosen profession.
One might ask whether this man operated as an economic dictator. He did not; in fact, he seemed to be of one mind with his board. A kind of group expertise can exist between associates, whereby they arrive at a group world-view.
The presentations which quoted companies make to analysts and institutional investors are (edited) verbalisations of the group world-view of their boards. But verbalised they must be, since expertise resides in the human subconscious; a Proustian amalgam of recollected lectures, books, articles in journals, and above all the sights, sounds, smells and textures of the bakery, the operating theatre or the public accountants office. We are all experts who use our interior world-views to make bets with one another about the future states of the world. Experts win and make money, while the also-rans lose it, and can reach a stage when they are out of the game altogether. That is why human civilisation has developed money.
The record of an expert’s stakes and pay-offs in this continuous gambling spree gives a cloudy picture of his or her internal world-view, or expertise.
Moreover, it becomes apparent that the efforts of the accounting standards boards are intended to prevent experts such as my bakery director from using more sophisticated means of shading off their objective transaction accounts, to something more in line with their intuitive internal world-view.
And that is why I doubt whether the future of the accounting profession is as gloomy as conventional wisdom suggests. The sort of accounting we now practise is the best that could be achieved with a quill pen and an abacus. Sage and the rest of the systems are merely sophisticated robots which have been programmed to manufacture bigger and better ox-carts.
The real accounts of every enterprise are more informative statements located in the individual or collective psyches of the management. In fact, they are interior balanced scorecards covering the whole range of significant information about the organisation. Why do people pay good money to have a printout of what they already know better than anybody?
It may be that they hope for suggestions which might make their world-view more effective, but another reason is to provide authority for the accounts, plans and targets which the management wants to present to other people.
In earlier times it was not possible to access these statements, because expertise is not held in a verbal format. People had to be content with the shadow of that expertise captured in transaction-based accounts. But now the techniques for building expert systems are well-developed, and it seems possible to construct any firm’s balanced scorecard and ‘presentation to financial analysts’ – as an online, real-time website. A working system could be plucked off the shelves tomorrow, and the accounting profession is the most likely source of experts who could devise the protocols for systems this area would need.
There is even an audit function here, since someone has to certify the integrity of the system and its contents. The work of Robert Elliott’s AICPA/CICA committee on assurance services and the more general work carried out on secure websites would seem to have developed the necessary hardware and software for this as well. Again a field (unlike general consultancy) where the accounting profession would have an overwhelming edge on any would-be competitors.
But now we come to the tragic bit. Notwithstanding the development of electronic filings of various returns and statements, balanced scorecard packages and even static corporate websites, there seems to be no market for truly online, real-time company websites! This is unsurprising if one appreciates that managerial expertise is the heart of what corporate governance is about. If this material was to go on a website, one would have a very open system of corporate governance indeed.
Managers might prefer to keep the content of the system of governance under wraps, and talk about its machinery instead. Nor are the financial analysts and institutional investors more enthusiastic for greater disclosures.
Much of their mystique would be gone if the data were available on public record. It may be that private shareholders prefer to be told what to do by some financial guru, and might feel confused or even threatened if they or anybody else could access the relevant information directly.
But it was like this in the days of pen-and-ink and bound ledgers, and yet there is legislation which requires the statutory disclosure of mainly transaction-accounting information about corporations, although shareholders mostly still do not read the accounts sent to them. It is the stock market and State which demands the publication and dissemination of this material, in the public interest and so as to secure a more efficient capital market.
This is the driving force for better corporate governance, whose proper development has been hampered by the absence of rigorous tools of analysis which expert system-based accounting might supply. We may suppose one of these days, the Stock Exchange and the State will realise that electronic data processing makes possible much greater transparency than can be achieved on paper. They already know that parallel development of electronic commerce is making it more difficult to capture what is happening through conventional transaction-accounts.
Some might wish that our professional bodies seemed more aware of the developments and devoted more time to telling the Stock Exchange, the State, and above all the public, of the benefits which the profession will be bringing them. But in truth, we are all approaching the future at the rate of 24 hours a day.
Trevor Gambling, FCA, is a sole practitioner based in Lickey, Birmingham.
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