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Accounting profession at a crossroads

Recent accounting failures have highlighted the role of public accounting firms in the modern economy. As the industry faces disruptive technologies, it’s crucial to examine the role of public accountants and assess if current standards and regulations provide sufficient assurance.

Recent accounting failures have put the role of the public accounting firm in the modern economy in the spotlight. The focus in recent years has been on the fact that the accounting profession is attracting less and less people to the industry and is then struggling to retain the professionals who are remaining in the industry for shorter periods. The problem, however, is deeper and more nuanced than it appears at first glance. As the accounting industry looks set to be disrupted by big new technologies, it’s perhaps time to interrogate the role of the public accountant and whether current accounting standards and regulations are providing sufficient assurance.

Consider the recent Silicon Bank debacle, for example. The bank had invested a large amount of bank deposits in long-dated instruments including long-term U.S. treasuries and mortgage-backed securities, secured with short-term variable deposits. However, when interest rates started to rise, bonds and treasury values fell with the result that Silicon Valley Bank’s bond portfolio started to drop. When the bank announced that it would need to sell a large portion of its securities at a loss as it was short on capital, it rapidly triggered a customer run on bank deposits.  Silicon Valley Bank’s stock was shorted in a matter of hours, rather than weeks or months. The speed at which this occurred was unprecedented.

Having failed to protect their liabilities with short-term investments for quick liquidations, the bank was unable to meet the run and Silicon Valley Bank collapsed just 48 hours after disclosing that it was selling bonds at a loss.

What happened at Silicon Valley Bank has significant implications for the public accounting industry. How was the bank audited? How were securities being measured and risks accounted for? There were clearly accounting principles at play here that were woefully inadequate for the modern economy. In a similar vein, we have regulations that are no longer fit for purpose. Going forward, regulators will be looking at all sorts of mechanisms to help avoid a collapse of this nature again.

What happened at Silicon Valley Bank is likely to happen again. The reality is that in an era of artificial general intelligence (AGI) it won’t take much for a hedge fund or trading platform to short stock. When that happens expect collapses like Silicon Valley Bank in real time. There is little that regulators can do about it because current accounting standards and regulations do little to help regulators identify red flags.

But, just as accountants are having to understand and navigate an increasingly more complex banking and financial ecosystem, so too have authorities in the U.S. reduced the number of hours required to become a chartered accountant, and with more organisations trying to reduce costs, there are less people now doing the actual work. The result is that those responsible for managing the checks and balances of an organisation’s financial health are less qualified than ever. And those that are doing the checks and balances are less skilled because they are being qualified more easily and promoted sooner to help address the shortage of professionals.

The slow adoption of technological innovation in the accounting industry that could relieve accountants of more mundane, repetitive work does not help. The sheer volume of this repetitive work is dissuading many accountants from remaining in public accounting, contributing to the current skills shortage.

To address the disconnect, we need to relook the role that public accounting plays in the way that businesses provide assurances on their financial data and statements, particularly given the introduction of AGI and the speed at which things change in the market. Currently, there is no incentive for public accountants to focus on providing a more efficient and better service. As soon as accounting firms bring too much technology to the process, thereby reducing the number of people and time required to do the work, they reduce their own revenue. A poorly structured model incentivises the wrong behaviour putting the entire industry into a downward spiral. The problem is that nobody has identified a path out of this downward spiral.

While it may not be the role of the public accountant to act as a market watchdog, they do have the potential to play a bigger oversight role in governance using aggregated data sets.

At the same time, we need to look very critically at how we can retain accountants in the industry.  Currently, most new graduates see public accounting as a steppingstone to something bigger and better. And who can blame them: we’re graduating smart kids to be accountants and then asking them to essentially paint by numbers as quickly as possible. The majority of public accountants spend 98% of their time doing mundane work s and only 2% of their time on higher level critical thinking.

We’re dealing with a generation that is more informed than ever. They want to work for organizations that have an impact and a purpose. Asking newly graduated accountants to spend the majority of their time doing work that could just as easily be automated is not sustainable. Instead, they need to be sufficiently mentally stimulated and feel that the work they are doing has meaning and purpose.

Exacerbating the situation is the fact that most mid-level firms are not investing in upskilling their newly recruited talent, instead preferring to invest in their retirement pool for the benefit of partners who are about to retire.

The CPA skillset is in demand by all organizations. Why then would an accomplished and smart accountant want to remain in public accounting when they can move to an organization where they are appreciated, their acumen is better utilized, and where they are making an impact?

Burying our heads in the sand is not a sustainable solution. Accounting firms need to relook at how they retain skills. At the same time, we need a deeper conversation with regulators about how accountants and auditors can paint a more honest picture of a business’s financial position in order to address the misalignment that currently exists.

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