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Jacob Soll

By Jacob Soll, Professor of History and Accounting at the University of Southern California and author of The Reckoning, published by Basic Books US and Penguin UK

For accountants, financial crises and scandals can seem bewildering. While some financial crises have roots in accounting fraud, many others stem from what we might call accounting blindness.  From ordinary citizens to bankers and politicians, people do not like to face their books or discuss accounting.  Indeed, with all our crises, we rarely hear about accounting or from accountants themselves.

A 2005 study by Lloyds Trustee Savings Bank of Britain showed that accounting anxiety has led to “balance denial syndrome,” in which bank customers so fear being in the red that they systematically ignore their bank statements. Ignoring accountants, however, is more than a syndrome. It is a long historical tradition that goes back to the very beginnings of finance.

Early pioneers of financial management recognised the inherent anxiety brought on by keeping account books. One of the richest merchants in late-medieval Italy, and a famed practitioner of double-entry bookkeeping, Francesco Datini (1335-1410) complained that keeping complex books was a “vexing” challenge that almost drove him out of his mind. He noted that other businessmen simply ignored their books, as the stress of keeping them, and facing their financial challenges were too much. The only way to face the challenges of keeping good books was by iron discipline. One would have to write in their books “all night” if necessary and not even get up from their chair “until all is done.”

One fact overlooked by historians was that both accounting education and public accounting took six hundred years to catch on in Europe.  In 1340, the Genovese government kept a central ledger to manage state affairs. Throughout Renaissance Italy, a financially literate population kept good books and used these skills for business, but also for public administration.  Yet with the decline of the Italian Republics and the rise of monarchies in 1500, this tradition faded.

This was often due to the fact that account books were a source of political accountability. Louis XIV, known as the Sun King of France, did learn bookkeeping from his finance minister, Jean Baptiste Colbert.  And at first, he was deeply interested in it as a tool of management.

For 20 years Colbert made miniature ledgers that Louis kept in his pockets. But as the building of Versailles and the maintenance of his army and navy during his wars against Holland and Spain strained the royal finances to the point of collapse, Louis stopped keeping the ledgers. His books began to reflect his own poor management and he chose not only to discontinue his miniature ledgers; he also undermined financial administration within the state so that no one could keep clear books.  Louis could not stand facing his books and considered himself only accountable to God. By the time he died in 1715, public debt was nine times the annual royal revenue.

In countries with more open government and with more business-friendly cultures, there was a higher degree of accounting literacy and government accounting. And yet, with hundreds of years of experience, Western governments did not adopt systematised double-entry financial management until the 1830s. Accounting doesn’t work unless societies engage with it and work for it to bring financial clarity and transparency.

With the bumpy history of accounting in mind, it is not surprising that we are back, in many ways to the old crises in accounting of the old European monarchies. The general population is, for the most part, ignorant of basic accounting techniques and even the US government does not use accrual accounting. Accountants have a tarnished image and little place in public discourse. Few would name accounting as a necessary element for good government.

Our own crisis in accounting, I believe, is one reason we have financial crises. The general population cannot understand accounts and few call for audits and demand higher standards as both shareholders and voters.

One way to stabilise private and public finance across the world would be not only to sponsor and promote accounting literacy, but also to try and improve the image of accountants. Indeed, leaders in accounting need to be more outspoken about financial standards and events. And we need to get to a point where, when there is a crisis, the public asks, “what do the accountants think?” For that to happen, the very profession of accounting needs to be rebranded and refocused towards public advocacy, education and service.  Only then can we move towards higher standards of transparency and accountability necessary for sustainable capitalism and democracy.

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social technologies

By Warner Johnston, head of ACCA USA

People have been using computer-based networks for decades to create, share and exchange information and ideas. The rise of social media was driven by people, not organisations. Historically, IT innovation was driven by big business and the military, but blogging, instant messaging, and sites for sharing pictures and music have become established as popular personal communication and collaboration tools. These have then attracted the attention of businesses, government bodies, charities and other organisations that also wanted to exploit them to improve communication and collaboration with and between their many internal and external stakeholders.

As more organisations explore the possibilities offered by public social media and ‘enterprise’ social tools they are finding that they can help to:

  • improve communication and collaboration (inside and outside the enterprise)
  • enhance decision-making and productivity
  • open up new routes to investment
  • support the development of new products and services
  • improve understanding of customers and clients
  • personalise customer experiences
  • analyse and respond faster to feedback
  • tap into and exploit intelligence outside the enterprise
  • source, attract and engage talent, and
  • develop a brand and build brand loyalty.

When businesses began exploiting social technologies they tended to focus on many of the same types of social media as had gained popularity with personal users. At one end of the spectrum businesses are using LinkedIn for recruitment and Facebook for brand management. At the other end, sites such as Crowdfunder and Kickstarter are being used to raise investment for start-ups and established businesses. The Securities and Exchange Commission in the USA has announced that social media outlets such as Facebook and Twitter can be used to make disclosures to investors (SEC 2013).

The appeal of a Facebook-style interface tends to be generational, but research shows that social technology ranks second behind analytics as a technology innovation priority. Adoption is expected to increase as accountants in practice and the finance function understand what social collaboration can do to improve their performance.

Research by ACCA on the technology trends that will impact the profession shows that a significant portion (59%) of respondents expect widespread adoption by the profession within the next two years, and 29% within the next two to five years. Over 9% expect to feel the impact on the finance function between five and ten years from now, and just 2% expect no impact on accountants and the finance function.

As enterprise social functionality improves, social tools will become more useful to the finance function. In an ideal world, collaboration software will develop situational awareness that enables it to contextualise processes and the roles and relationships of participants. In the context of finance, for example, software needs automatic understanding of the difference between general exchanges and any that must be tightly controlled – such as exchanges between tax and finance departments.

Read more about the technology trends that are impacting on the accounting profession at http://roleofcfo.com.

tall building, modern CFOBy Jeffrey C. Thomson, CMA; President and CEO, IMA

According to The Changing Role of the CFO, a new report co-published by ACCA and IMA®, CFOs will face many challenges in the future, including global economic uncertainty and volatility, fluctuating energy prices, and turbulent currency markets, along with a shift in economic power. The report identifies emerging priorities that will impact the future role of the CFO and cites nine future key issues that will shape the finance function’s top job, including regulation, globalisation, technology, risk management, transforming finance, stakeholder engagement, strategy, integrated reporting, and talent.

Of course, these emerging priorities could well vary by global region depending on regulation, socio-economic factors, environmental conditions, culture, and more. But as a former U.S.-based CFO, I wonder if we in the U.S. face a couple of unique challenges associated with regulatory uncertainty and litigation. These issues exacerbate the ‘day-to-day’ challenges – and opportunities – of today’s CFO team.

First, let me tee up the uncertainty associated with regulation. Usually, when we discuss the CFO team’s lead role in dealing with uncertainty and disruption, it is in connection with consumers and competition, not regulation since that tends to be a ‘known’ quantity with exposure drafts, comments letters, discussion roundtables etc. before a regulation associated with financial reporting even goes into effect. Specifically, I am focusing on the uncertainty associated with adoption of IFRS in the U.S. Will the U.S. adopt IFRS? If not in full, what would an ‘incorporation’ model look like? The larger questions are around the degree to which U.S.-based CFO teams should begin the training process and technology changes necessary to affect a massive shift from the decades-old US GAAP. This is not the resource allocation challenge that CFOs deal with every day in trading off returns on various investments; it is a long-term decision to invest in training and technology without clarity as to ‘if, how and when.’

Smart CFOs will need to do two things: (1) Hire and nurture good technical talent, so adopting to any deviation to pure-play GAAP will be that much easier; and, (2) Stay close to the regulatory scene and be a proactive advocate for the best solution (e.g., SEC, FASB, IASB, IFRS Foundation, etc.)

The second, arguably unique challenge for U.S.-based CFOs is with integrated reporting, or, the evolution of external corporate reporting. At least in the U.S., the external disclosures are voluminous and yet do not adequately inform stakeholders as to long-term sustainable value generation and growth because they are too financially focused, too complicated, and yet not comprehensive enough. But the unique challenge in the U.S. is not so much about selecting more non-financial measures, or measures more of a leading indicator variety, or even how to source and report measures such as employee learning and growth, process improvements, sustainability, carbon footprint, societal contributions, or governance factors. It is the litigious nature of society and an often ‘unforgiving’ regulatory environment in the U.S. If this challenge is approached as ‘let’s report everything – and thus subject it to internal controls and audit – because it may be useful to some stakeholder in the future,’ then much like in the early days of Sarbanes-Oxley, integrated reporting will be viewed as a ‘social tax’ with little societal good and expensive shackles placed on corporate entities. There are no easy answers here, but leading CFOs need to be at the table to find the right balance, rather than waiting for the steam-roll effect of transforming external corporate reporting ‘to just happen.’

What do you think?


by Ian Welch, head of policy, ACCA

So the Dodd-Frank Bill, dubbed the biggest overhaul of US financial regulation since the 1930s, has been signed into law

President Obama's political opponents are already warning that the vast 2,300 page bill will damage US competitiveness and lead to business uncertainty, given that it instructs government agencies to create hundreds of new rules and regulations and guidance notes.

It will only be possible to say whether such a huge regulatory and structural change is a success with the benefit of several years' hindsight, but there are parts that look good. The establishment of a regulator for consumer protection has to be a good thing, given the sub-prime mortgage disaster that sparked the financial crisis. While the principles of caveat emptor must always apply, groups of consumers who are new to financial products markets are entitled to expect a degree of official support.        

Similarly, the efforts to address one of the key aspects of the financial crisis – the 'too big to fail' banks – must be applauded. A re-introduction of Glass-Steagall was never going to be on the cards, given the strength of US banks lobbying, but procedures that will allow the safe dismantling and winding down of a huge bank in peril, without causing mayhem in the wider market as the fall of Lehmans did in 2008, must be a big step forward. The concept of moral hazard has to be maintained and this appears to achieve it.

Other measures such as driving more derivatives trades through public exchanges should increase transparency while the requirement for credit ratings agencies to establish internal mechanisms for determining their ratings, to use additional external sources of information and to disclose their methodologies, seems eminently sensible. The promised SEC probe into agencies which for years have suffered from an essential conflict of interest – ie rating the same institutions that pay them – will keep them on their toes.  

Of course, any huge regulatory shake-up – especially one that involves setting up new agencies and reshaping responsibilities of existing ones – suffers from the potential danger that teething bureaucratic problems will overshadow and mar what is trying to be achieved.   

It is interesting that some are comparing the current US regulatory overhaul with the Sarbanes-Oxley legislation of 2002. That Act, which followed the Enron scandal, was for years demonised by many in the West as the epitome of knee-jerk, excessive over-reaction, which cost business billions to no great purpose. Last month, it even had to survive a concerted legal effort to derail the Act by its opponents.

Yet it is now largely recognised that Sarbox, by requiring senior corporate officers to take personal responsibility for the accuracy of their firms' accounts, has led to increased accountability and transparency. And while it did not prevent the governance and ethical failures among financial institutions that was central to the financial crisis, how much worse might the situation have been without it? Sarbox, together with strict US Federal sentencing guidelines, has had an impact on executive behaviour.

A 2007 survey carried out for ACCA by CFO magazine found that among finance executives in Asia Pacific more than half found that Sarbox was useful to them in helping to establish financial disciplines, processes and internal controls. The fact that everything had to be documented and audited, far from being a burden, was seen as giving the businesses more confidence to focus on growth.

Might it be that opponents of regulatory change simply have to accept that a huge crisis will inevitably mean a major response? Certainly, bureaucratic overload must be contested – and Sarbox's requirements have probably had adverse effects on smaller-listed businesses. But crying wolf and exaggerating the threat to national competitiveness is not helpful.