Robert Kugel's Analyst Perspectives

Make Accounting Cool (Again)

Posted by Robert Kugel on Sep 12, 2018 8:18:32 AM

Was accounting ever cool? Well, yes, in a nerdy sort of way. Double-entry bookkeeping, codified in the 15th century by Fra Luca Pacioli, a Franciscan friar and pal of Leonardo Da Vinci, was essential for the expansion of trade and the creation of the modern corporation. Bookkeeping and accounting were as important to economic development as two other financial inventions – insurance and fractional reserve banking. Double-entry bookkeeping is an elegant system, simple yet powerful. It supports the accurate recording of transactions and the economic condition of a business as well as analyses of its performance. That’s cool.

Today, though, the stereotype holds that accounting and accountants are anything but cool. So how can we make accounting cool again?

We’re on the cusp of the third major accounting advance made possible by technology. The first occurred with the advent of the information age in the 1950s and 1960s. People-intensive functions such as billing and transactions processing were automated using digital computers. The second began in the early 1990s with the adoption of client-server ERP systems and business intelligence tools. Over that decade, departments became substantially more efficient. This was evidenced by the 42-percent decline in the number of finance and accounting department employees per million dollars of revenue. Since then, however, there have been limited gains in efficiency.

The next stage in the evolution of the finance and accounting department will transform the nature of accountants’ work. Accounting is unlikely to become glamorous anytime soon, but it is about to be “cool” again. I mean cool in the sense that over the coming decade technology will eliminate much of the tedium now associated with it. Ventana Research calls the next stage in the application of information technology to the finance function “Robotic Finance.” It will automate much of the repetitive work that today requires some human intervention. Robotic Finance includes emerging technologies such as artificial intelligence (AI) and machine learning, robotic process automation (RPA), bots utilizing natural language processing and blockchain distributed ledger technology.

These will expand the scope of automation to free individuals from having to perform rote repetitive tasks. They will streamline and standardize processes and procedures by having systems recommend courses of action. They will support data integrity, ensuring accuracy and eliminating the need for checks and reconciliations. They will strengthen governance and control, thereby cutting down on the time required for thorough auditing.

In so doing, technology will take the robotic work out of accounting jobs. It will make it possible for the finance and accounting organization to play more of a forward-looking advisory role in addition to its transactions processing and fiscal control functions. Although many have focused on how technology will eliminate jobs in accounting, it’s more likely that there will be about the same number of people in the department. However, the roles and skills of these people will be different.

Meanwhile, the application of columnar database technology and in-memory processing is beginning to revolutionize the performance of ERP and financial management systems in a way that makes a new approach to accounting possible. Ventana Research calls this new approach “continuous accounting.” It’s now possible to quickly generate a trial balance and monitor the financial condition of the entities recorded in the system in near-real time. It’s also possible to create a virtual close at any point by calculating (but not posting) depreciation and amortization and accruals such as sales commissions. Executives and managers will be able to monitor their financial performance more closely without the lags that are common today. Reporting will be more automated and self-service-based, so people in the department won’t be spending hours pulling together data that they dump into spreadsheets. Reports will be more immediate and more comprehensive.

More timely and comprehensive reports are the result of ongoing advances in data preparation technology, a topic on which my colleague David Menninger has done research. Increasingly, the “numbers” that run the company are a fusion of operational and financial data. The ability of finance departments to routinely collect and synthesize operational and financial data from multiple sources is critical to their ability to perform the analyses necessary to manage a company. Efficiently bringing together an evolving set of timely data is central to being able to provide such analyses. Perhaps for this reason, nearly nine-in-10 participants (88%) said that self-service data preparation is important. The finding suggests that tomorrow’s finance department will be equipped to synthesize financial, operational and third-party data to provide analysis and forward-looking guidance to executives and managers.

The snag in this rosy scenario is that finance and accounting departments must embrace technology as a catalyst for achieving major improvements in processes and thus enabling the department to take more of a forward-looking advisory role within the organization. In most companies, the danger is that without leadership, organizational inertia will slow adoption of new technologies while echoing the familiar phrase, “We’ve always done it this way.” Our Office of Finance benchmark research finds that most finance departments fit the profile of a reactive organization. Just 10 percent of the departments participating in the research had sufficient competence across people, process, information and technology dimensions to qualify as innovative performers – the highest level of competence and effectiveness in our assessment. By contrast, 51 percent were at the lowest tactical level.

vr_Office_of_Finance_27_finance_lags_innovation(1)-3There are reasons to be optimistic, though, that organizations will embrace the changes made possible by technology at an increasingly rapid pace in the 2020s. One is that finance and accounting departments, especially in midsize and larger companies, have evolved steadily over the past few decades in adopting new information technology. There aren’t nearly as many adding machines or calculators on the desks of accountants as there were 20 years ago.

A second reason is that we’re making progress “one gold watch at a time.” An older generation that is less comfortable with technology is being replaced by those who don’t know how to use a rotary dial telephone. The third is the technology itself. The technology “breakthroughs” of past decades now appear quite primitive. Business applications are reaching a stage where they are transforming how work is performed, rather than applying simple automation. The cluttered and tedious user interfaces that were the norm for decades are giving way to designs that facilitate thought as well as promote efficiency.

Technology is the key to driving change. Those already in the profession who aren’t facing retirement and those considering accounting as a profession must be ready to embrace a different mindset, one that more readily accepts change. A fast-follower approach to technology adoption is now a necessity because robotic finance technology isn’t some futuristic dream. Artificial intelligence is at the core of fraud detection and AI programs built by Alibaba and Microsoft have edged out humans on a Stanford University reading comprehension test. Bots are a fixture in customer support and systems integrators are aggressively applying RPA to address data integrity issues that add to finance department workloads. Blockchain initiatives and demonstration projects ranging from securities trading to documenting the provenance of Thanksgiving turkeys are proliferating.

New business tools provide people and organizations that are willing to adopt them early with an opportunity to gain an advantage over those that are slower to pick them up. Departments must become fast followers of technology to enable their corporations to achieve a competitive advantage or at least remain competitive – to become cool once again.

Regards,

Robert Kugel

SVP & Research Director

Topics: Analytics, Business Intelligence, Big Data, Office of Finance, Continuous Planning, ERP and Continuous Accounting, Financial Performance Management, Enterprise Resource Planning

Robert Kugel

Written by Robert Kugel

Rob heads up the CFO and business research focusing on the intersection of information technology with the finance organization and business. The financial performance management (FPM) research agenda includes the application of IT to financial process optimization and collaborative systems; control systems and analytics; and advanced budgeting and planning. Prior to joining Ventana Research he was an equity research analyst at several firms including First Albany Corporation, Morgan Stanley, and Drexel Burnham, and a consultant with McKinsey and Company. Rob was an Institutional Investor All-American Team member and on the Wall Street Journal All-Star list. Rob has experience in aerospace and defense, banking, manufacturing and retail and consumer services. Rob earned his BA in Economics/Finance at Hampshire College, an MBA in Finance/Accounting at Columbia University, and is a CFA charter holder.