| Will accountants survive the digital revolution? |
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Knowing that part of your conference will address the role of artificial intelligence in accounting and business, I asked ChatGPT to answer “Whether accountants and business professionals will survive the digital revolution?”
You will be glad to know that ChatGPT thought we would indeed survive the digital revolution. It also gave ideas of how me might avoid “extinction”.
What was clear from my engagement with ChatGPT, was that to survive, we will need to adapt. We can no longer be bean counters, spread sheet jockeys, little grey “people” or whatever picture you have when you think of finance professionals. |
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To avoid extinction, we need to change and we need to demonstrate how we add value to organisations and to the broader economy. One of the areas where I see us doing this, is to no longer be the ones generating data – this will be done by machines. We need to be the ones analysing and interpreting data, and turning it into information.
If I use the analogy of the bean counters, our role has traditionally been to count beans. If we are to survive, we will need to tell the story of how we counted the beans, describe the qualities and characteristics of the beans, the risks associated with the bean purchasing or harvesting activities, and whether we will be able to access more beans in future.
In short, we need to be storytellers. |
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| We need to be better storytellers |
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Being a storyteller could mean that as a finance professional you’re contributing to, or generating information for, a single report, or being responsible for an organisation’s whole “financial report”. Finance professionals are involved in so many aspects of an organisation, that we are ideally placed to put all the pieces of the story together.
Good financial reporting is all about our ability to tell a good story. This is even more important as we start to link the financial statements to areas that measure an organisation’s status as a ‘good, responsible citizen’ that creates value for its stakeholders and the broader economy through its use of financial and other resources (including the environment).
In my view, there are a few aspects that make a good story and these are: having an integrated mindset and applying integrated thinking; using materiality as our measure of relevance; the sound application of accrual based accounting standards; and reporting on sustainability. Integrated thinking
Having an integrated mindset and applying Integrated thinking means knowing the story that needs to be told from start to finish. The story is about how an organisation creates value, preserves value, and prevents the erosion of value through the use of various capitals, including: Financial capital. Created/manufactured capital. Intellectual capital. Human capital. Social capital. Natural capital. The idea of value exists in both the public and private sectors albeit in different forms. Integrated thinking and reporting in the private or public sector requires an understanding of an organisation’s purpose, strategy, culture, risks and opportunities, and its ultimate performance – which in today’s environment focuses on both financial and non-financial measures.
When I think about integrated thinking and its value, I like to use a public sector example as it best demonstrates how we can turn data gathered in various process into information and a good story.
The purpose of public sector organisations stems from an overall framework or strategy for government – for example – the UN sustainable development goals and economic goals. These are translated into strategies for levels of government and in turn for individual organisations. The story starts with organisational strategy, which is supported by a budget and a performance plan; the story ends with the financial statements and a performance report.
If the story is about an organisation involved in building social housing, an entity’s annual performance plan should indicate how many houses should be built; the budget should indicate how much the houses should cost; the financial statements should indicate the actual cost of the houses built (e.g. through functional classification of expenses or the segment report); and the performance report should indicate how many houses were built. If we add on sustainability, we would explain how the building of those houses contributed to various sustainable development goals – e.g. how many families have safe homes, reduced illness + absences from school, and potential effects on the environment as a result of the housing development.
No doubt that all the information generated in the various processes will be done through an automated process; but there is also no doubt, that it is a human that will be telling the story of how this organisation and its houses contributed to the economy.
Let’s move onto materiality.
Materiality
Materiality is the quality that differentiates good and bad stories – by good and bad I don’t mean stories that are positively or negatively biased. What I mean by “good” is a high-quality, relevant story.
Good stories are relevant to readers of financial statements and other reports as it gives them the information they need to make the decisions that are critical to them. In the private sector, the decisions are about the return on or of capital in the financial statements, and assessing value creation, preservation and avoiding the erosion of capitals. In the public sector, this includes holding officials accountable for the resources entrusted to them, and to make social and economic policy decisions. Whether in the public or the private sector, materiality means telling an organisation’s story and differentiates it’s story from others.
The IASB published research earlier this year from national standard-setters about (1) how preparers and auditors apply materiality, and (2) whether they use the IASB’s literature in preparing or auditing the financial statements. The results indicated that finance professionals often do not understand materiality, do not apply it, and some rely on the external auditors to tell them what their materiality should be. Some of the auditors in turn were not aware of the materiality guidance available to preparers, and therefore only considered materiality in their audits (which is about assessing the risk of misstatement) rather than assessing the quality of the financial statements.
One of the reasons cited for not applying materiality was the desire to achieve compliance with the Standards (which means applying a “tick box approach”) rather than wanting a high quality set of financial statements. This compliance culture is driven by the fear of not wanting to be seen as deficient with the auditors, or simply that it is easier to follow a culture of compliance.
A way in which technology (in my mind) is adversely affecting financial reporting is the automatic generation of financial statements. These financial statements are generally produced without any “intelligence” – the software simply takes the mandatory and other requirements of the reporting framework and generates a report. No doubt the proliferation of this software will continue and extend to ESG reporting too.
Our role as professionals is to apply our judgement – apply materiality – and produce high quality information that is relevant to the readers of the financial statements and other reports. It is our job to tell a good story, not one of compliance and conformance.
Applying accrual accounting and applying it as intended
The next part of our story telling journey is to ensure that all the characters – the heroes and the villains – are part of the story. The heroes are assets and revenue, and the villains are liabilities and expenses. It is vital that the financial statements include all the elements – assets, liabilities, revenue and expenses.
While accrual accounting is a given for many organisations, for others, particularly government organisations, it is not. Before we move to sustainability and other reporting, we have to fulfil our commitment to provide a complete, unbiased position of an organisation’s financial performance and financial position.
Sound application of the accounting and reporting Standards is about knowing the rules of good, credible story telling. In this context, it’s about knowing how to apply the principles in the Standards correctly and applying judgement. Accounting is a social science. This means that our judgement as finance professionals, when applied to a set of facts and circumstances, could result in different answers. What is important is knowing that the correct principles were applied in a particular context, and explaining the thought process. Sound application also means telling the story responsibly and as the Standards intended.
While machines may understand the broad rules that are set for reporting, it our judgement to a particular set of facts and circumstances, that sets us apart.
Lastly, the topic that dominates every accounting conversation at the moment – sustainability reporting.
Reporting on sustainability
My discussion earlier on integrated thinking highlights the need for reporting on financial and non-financial value, and how something like sustainability reporting fits into the overall assessment of value in organisations.
It is clear that sustainability reporting presents an opportunity for finance professionals to take the lead in a new market – whether consulting, preparing or assuring sustainability information.
However, my caution is that simply providing more reporting, without telling a true story, will simply add more complexity, create an increasing compliance culture, and really ensure that no one reads the information we produce.
In closing
Lastly, I was reading an article yesterday about how AI is being used at the University of Pretoria here in South Africa as an educational tool in the Chartered Accounting stream. One of the questions was about the potential threat of AI replacing teachers and academics. Happy to report that the article indicated that educators would indeed not be replaced.
While I am not an academic, I believe that we all have a role to play in developing and shaping the new generation of finance professionals. We need to teach them to think differently about their work, and their roles in society. For me, it is through storytelling that we avoid becoming obsolete – extinct – and ensure our survival.
To quote an African philosopher Ben Okri “The greatest religions convert the world through stories”. There is an inherent storyteller in each of us… |
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