ACCOUNTING IN THE 21st CENTURY
Robert K Elliott
Partner, KPMG LLP
November 2, 1998
[Introductory note: Robert K. Elliott is a partner
in KPMG LLP in New York. He is the vice chair of the AICPA Board
of Directors for 1998-1999, and will serve as chairman for 1999-2000.
He currently chairs the AICPA Strategic Planning Committee and Strategic
Planning Advisory Subcommittee. He previously chaired the AICPA
Special Committee on Assurance Services ("Elliott Committee")
and the Oversight Board of the New York City Elections Project.
He has served as a member of the AICPA Board of Directors as well
as several committees of AICPA. He has also served as a vice president
of the American Accounting Association and as a member of the SEC
Advisory Committee on Capital Formation and Regulatory Processes
and the Accounting Education Change Commission. He is currently
a member of the Board of Trustees of the KPMG Foundation and the
Big 5 National Steering Committee for Legislative Action.
Named as one of "The 100 Most Influential
People in Accounting" by Accounting Today for four consecutive
years, Mr. Elliott was profiled as a "Leading Big Six Professional"
by Professional Services Review in 1995. He is the recipient of
numerous awards and honors, including the AICPA Gold Medal Award
for Distinguished Service (1997) and the Journal of Accountancy
Literary Award (1995). He holds an AB from Harvard University and
an MBA from Rutgers University, and is the author or co-author of
more than 80 books and articles.]
Thank you for coming out this evening and for giving me a chance
to talk to you about accounting in the 21st century.
What I want to do for the next 45 minutes or so is go through four
areas. I want to talk about the accounting profession's past, which
I would characterize as a glorious past. Then, we will come to the
present, which I would characterize as parlous or somewhat dangerous,
because we face significant choices. If we make the right choices,
we can look forward to a fabulous future as a profession. Then I want
to spend a little bit of time on what it is that we're going to have
to do in order to get to that future and realize those opportunities.
Let's start with a very short history. If you think about it very
much at all, you realize that it would have been impossible to have
an industrial revolution without an adequate accounting infrastructure.
Accounting enabled large-scale enterprises to form.
If you think about the debits and credits, the debits in accounting
transactions represent the benefits that company gets in an exchange
transaction, and the credits represent the sacrifices. So by making
these simple credit and debit entries, we can track contracts from
agreement to partial execution to full execution, and it gives us
a very convenient way to keep track of a large bundle of contracts.
A large bundle of contracts is nothing more or less than a corporation,
and a corporation is what's required in order to aggregate the capital,
build the factories, or outfit the ships, to have a mercantile and
industrial revolution. I don't say that accounting caused the industrial
revolution, but I do say there could have been no industrial revolution
without an accounting infrastructure to support it.
The accounting infrastructure permitted the companies to measure
and communicate, both within and outside. It facilitated planning
and decision making, and it allowed enterprises to fulfill their accountability
Those are all good things. And later on, auditing practice added
to accounting. You can find references to auditing in the Bible and
before that, but auditing as we know it today developed in the 19th
century as a way of adding additional reliability to accounting reports
for the benefit of absentee owners. They needed to make sure that
the managers on the spot were not ripping the owners off.
The audit also provided another set of benefits. I already pointed
to the ability to do planning and control. Another benefit is that
releasing high quality information reduces corporations' cost of capital.
Think about people who are putting money into an enterprise. Whether
they are investors or creditors, they want to be rewarded for the
risks that they are taking. So they want to charge an amount for the
capital that's proportionate to the risk that they are assuming. Part
of the risk is economic risk, and part of it is information risk;
that is, it's the risk premium that investors and creditors have to
charge because they are not sure about the true facts about the enterprise.
They put in a risk premium to compensate for that. The more high quality
information the enterprise gives, the lower the information risk,
the lower the price investors and creditors charge, and, therefore,
the lower the capital cost of the enterprise. That's a huge benefit.
What we do also improves liquidity. What is liquidity? Often, people
think that liquidity is a function of having lots of buyers and sellers
in the market. If you have that, you have a liquid market, but it's
really more subtle than that. Liquidity has to do with the size of
the bid-ask spreads and number of transactions. Where you have wide
bid-ask spreads, relatively few transactions take place, and you have
illiquidity. Where you have narrow bid-ask spreads, lots of transactions
take place. Let me give you a couple of examples of that. I have an
oil painting by Rembrandt and I'd like to sell it to you. Now, you're
thinking, "If it's really by Rembrandt, and if he is telling
the truth, it's worth a great deal of money; but if it's not by Rembrandt,
it may not be worth much money at all." What are you going to
do when you make me an offer for it? You're going to provide for the
possibility that you don't have the right information. You're going
to have a low-ball bid; I know you're going to do that, so I raise
my asking price. A big bid-ask spread opens up, and what you can notice
in the market for old master oil paintings is that the bid-ask spread
is typically a third of the price or more. As a result, very few of
them change hands.
It's a very illiquid market. Why? Because buyers and sellers have
very different information from each other about the quality of the
goods. That's called information asymmetry.
Look at another market, the market for Government bonds. There, both
buyers and sellers have lots of information, and, in fact, they each
have the same information. Therefore, what you see in the trade of
Government bonds is that the bid-ask spread is measured in a few basis
points. These transactions take place all the time. The bonds trade
in the trillions of dollars a year. You have a liquid market as a
function of low information asymmetry.
In effect, what we do as a profession by providing both buyers and
sellers of securities with relatively similar information about the
securities is we reduce bid-ask spreads, making a more liquid market.
Is that good or is that bad? What happens is the liquidity in the
marketplace permits capital to seek its highest and best use.
Let me give you some examples from other economies. In Germany, capital
is not essentially allocated by a transparent stock market. It is
essentially allocated by the banks, and you have a very opaque environment.
There isn't much disclosure, and the banks tend to sit on investments.
What happens, therefore, is the German economy is essentially an industrial
economy. You think about German products and you think about automobiles,
steel, and chemicals.
Look at the Japanese economy. Although there is a stock market, that's
not really where the capital is allocated; it's allocated by the Keiretsu.
A group of companies take care of each other; mistakes are forgiven;
and they too sit on investments for a long time, whether they are
good investments or not. So you don't have a lot of capital movement,
and it's basically another industrial economy, making things.
In the United States economy, where we have very liquid markets and
where capital can seek its highest and best use, capital has moved
away from industrial enterprises toward post-industrial enterprises,
away from U.S. Steel and toward Microsoft. High liquidity facilitates
redeploying assets to their most productive uses. So the United States
economy, the most advanced economy, the most post-industrial economy
in the world, is largely that way as a result of the liquidity in
the financial markets, which is a function to some extent of the high
quality of accounting and auditing information available in that marketplace.
The audit function also adds market trust. Traders can go into the
market and trade with confidence that they are facing a fair game.
I tell you these things, that accounting has created enormous benefits,
but then I am an interested observer, right? I'm one of those CPAs
myself. How do you know that I'm not putting it on here?
I'm going to share a couple of quotations from the May/June issue
of Foreign Affairs. This is a high-brow magazine that's oriented
to people who are interested in foreign affairs, diplomacy, and so
on. If you picked up a copy of that magazine, would you expect to
see much information there on accounting? Probably not. But I'm going
to cite quotes from a single issue of this magazine just to illustrate
In one article on Japan, the author says, "Meanwhile, a variety
of other gimmicks have appeared to improve balance sheets and thereby
prevent public recognition of weakness or insolvency." What the
author is saying is that the lack of high quality accounting leads
to a situation where there isn't a facing up to the bubble economy,
to the bad debts on the banks' balance sheets, and so forth. The author
is attributing a lot of the financial malaise in Japan to a lack of
high quality accounting.
An article on India in the same journal says, "Retail investors
are scared away by the stock market scams. The resulting high cost
of capital makes Indian industry in exports less competitive."
Remember I said earlier that high quality information reduces the
cost of capital? Here's a perfect example. Here's an economy in which
people don't believe the information they get. They charge exorbitantly
high costs to lend capital or invest capital in companies. It means
that Indian companies have very high capital costs, so they are not
competitive with companies in other countries.
The third quotation from Foreign Affairs is about Russia.
It is by Grigory Yavlinsky, who says, "Open accounting that meets
international standards is a prerequisite to controlling corruption."
A different angle, right? You can't have an honest business environment
if you don't have honest, high quality accounting. So another benefit
of high quality accounting is that it helps prevent corruption.
Here's an author referring to the United States 100 years ago. This
author says, "The United States economy between the Civil War
and the First World War was notoriously crisis-prone, nor were catastrophes
like the Panic of 1873 pure accidents; they were made much more likely
by a business and political culture in which petty things like scrupulous
accounting were disdained." In other words, when we didn't have
a good accounting infrastructure in the United States, we had an environment
characterized by panic.
| Unlike Asians in particular, Americans know
more or less what the is being done with their money. Accounting
systems in the United States strive for clear corporate information.
No other country's financial system reflects such a willingness
to bring financial problems to the surface.
From A Second American Century by Mortimer
My fifth quotation is again about the United States, but now we're
fast-forwarding to today. This author says, "Unlike the Asians
in particular, Americans know more or less what is being done with
their money. Accounting systems in the United States strive for clear
corporate information. No other country's financial system reflects
such a willingness to bring financial problems to the surface."
These are not the observations of accountants; these are the observations
of people interested in foreign affairs who look at good accounting
as part of the solution and poor accounting as part of the problem
in various countries. So much for our glorious past.
Let's turn to the present, which I have characterized as parlous.
I start with a megatrend from the outside -- information technology.
As everybody is aware, the cost and size of all the components of
information technology are plummeting. That's Moore's Law at work.
Chip density doubles every eighteen months. What happens over time
is you get lower and lower and lower costs for central processors,
for communications, for sensors, for memory, all these components.
The price is plummeting.
At the same time, the power and integration is going up. It's skyrocketing
exponentially. It's hard to believe that three years ago, none of
us were on the Internet. Today we take it for granted. The network
has become ubiquitous. We have anytime, anywhere information. We literally
have an office in a briefcase.
That's today. Think what happens if we project those same rates of
change forward into the future and the enormous consequences they're
going to have. People in this room have more computing power on their
wrists than took the first astronauts to the moon. Think what that
means if you project that forward for another thirty years, when you
would literally have on your wrist or maybe even sewn into your body
more computing power than exists in the world today. That's what's
We all know about that, but what's important are the implications
for business. Business takes information technology and uses it. The
strategic leaders use it in strategic ways. They use technology to
get closer to their customers. Now let me explain what I mean by that.
Here we have a person at a point in time experiencing a need for something,
some product or service. Here's a bunch of vendors at different points
in time who can fulfill that need. Who gets the business? The one
who can fulfill the need fastest, the one who can shrink the time-space
gap between the emergence of a need and its fulfillment.
What is information technology about? The computing side of it is
about shrinking time. It's taking calculations that used to take months
and doing them in nanoseconds. The communications piece of technology
is about shrinking space. It's about making it possible to do business
around the world for anybody, at any time. Information technology
is about shrinking time and space, and the competitive gain is about
shrinking the time-space gap between the emergence of a need and its
Information technology is not just a tool of modern business; it
is the fundamental tool. Leadership companies use the technology to
get closer and closer to their customers in fulfilling their needs.
They use the technology to demassify products and services.
- Cost and size down--way down
- Power and integration up--way up
- Network ubiquitous
- Anytime-anywhere information
- "Office in a briefcase"
The whole idea of the industrial era was mass production. Everybody
could enjoy driving around in a model-T Ford for only $500 because
of mass production, but the flip side was that everybody got the same
model-T-black. It looked the same, and it was the same. With information
technology, you can, in effect, get away from mass production to mass
customization. You can provide each and every customer with his or
her own model. You can go to the automobile dealer, punch the buttons
on the computer, and select from literally quadrillions of permutations
of make, model, style, and colors.
Under the old idea, mass production, one size fits all, the Wall
Street Journal editor read all the news feeds and decided what
went into the paper. You can take it or leave it, even today. That's
the mass product, but the demassified product is logging onto the
Dow Jones News Service to see all the news feeds. You set the filters
in place that deliver you a daily newspaper that responds to your
interest, one that's different from every other newspaper in the world.
I could add many examples, but you get the point. You use the technology
to deliver a different product or service to every single customer.
Then, of course, you use the technology to improve quality, to constantly,
continuously improve quality, and to go global and have world-spanning
organizations. That's what the strategic leaders do.
Now the followers are faced with this dilemma: They can learn to
do these things themselves, emphasize quality, decrease the cycle
time to get designer products to market and deliver them to the customers.
They can use the technology to focus on the creation of value, go
global themselves, downsize, get rid of excess resources, go into
partnerships and alliances to pick up the resources that they are
missing, and make strategic use of it themselves. That's one choice.
They can elect to do that, or they can go broke; that's the other
Now let's focus, in this new environment, on the financial statements
that we prepare under generally accepted accounting principles. These
financial statements have been designed by the FASB and its predecessors
to describe the industrial-era enterprise, the enterprise that creates
value by physically manipulating tangible property like raw materials
and turning them, by the application of energy and labor, into finished
goods, then pushing the finished goods down the line to customers
physically. What you see on those financial statements are the very
tangible assets of that process. You see the raw material, the work
in process, the finished goods. You see machinery and equipment. You
see the buildings and the land.
That's what's on the financial statements, but post-industrial enterprises
run on a different set of assets. They basically run on intangible
assets, such as the capacity of innovation, research and development,
human resources, information and know-how, brand equity, relations
with customers and vendors, and relations with employees. These intangible
assets drive the post-industrial firm, and none of them are on the
balance sheet at all. We don't account for them.
Post-industrial enterprises run
on intangible assets...
- Research and development
- Capacity for innovation
- Human resources
...which are not in the financial
Now you're thinking, "Okay, but those are just the post-industrial
enterprises. Most of American economy is still making things-automobiles,
steel, food." Well, let me tell you, two percent of the American
work force is involved in growing things on farms, and ten percent
of the American work force is involved in making things in factories.
The rest of the work force is doing something else. Seventy percent
are involved in the creation, distribution, or use of information.
The economy has basically become information-oriented. Even industrial
enterprises are no longer strictly tangible-goods companies.
Let me give you an example: Motorola. It's a manufacturing company,
so it should be described by an industrial accounting model. Let's
look into that. Say you go down to the store and buy a Motorola cellular
phone that costs $100. How much of the $100 was for the physical content
of the phone? There is less than a penny's worth of sand, turned into
silicon. There is less than two cents worth of copper, to make the
wires to connect things. There is less than a nickel's worth of oil,
turned into a plastic box. What is the rest of the $100? Software,
research and development, innovation, brand equity, information. Manufacturing
companies are putting out more and more products that are post-industrial.
They too run on assets that are not in the financial statements.
Let's took at it graphically, on this slide. In the past, a company's
value-producing assets were largely tangible. There were intangible
assets, but tangible assets dominated. So at this end of the spectrum,
think of United States Steel. You've got steel mills, blast furnaces,
land, piles of coal. But the emergent economy is basically working
on intangible assets.
At the other end of the spectrum, think Microsoft and think of Microsoft's
balance sheet. I guarantee you, Microsoft's balance sheet has nothing
of interest on it whatsoever. What are the assets of Microsoft that
comprise the balance sheet? A couple of diskettes, probably not even
much land. Where is the some $300 billion of Microsoft's market value?
It's between the ears of Microsoft's people, not on the balance sheet.
Don't get me wrong; I'm not saying that we should take these intangible
assets and turn them into debit and credit entries, but I am saying
that ignoring them in the accounting model is a fatal mistake, because
what we're doing with these grand financial statements is producing
what's in the left-hand column. We're producing periodic historical
cost basis financial statements, five terms to describe what we provide
as accountants, but look at the right-hand column and you will see
the way in which people are used to getting information in every other
information domain besides accounting.
Periodic? No. People don't want periodic information. They want to
log on and get the information they want on demand. They want up-to-the-minute,
if not forward-looking, cost bases. I'm not saying they want to know
the current value of the assets as much as I'm saying they want to
know the capacity of this basket of assets to make customers better
off, to create value for customers.
Sure they want financial information, but they want much more than
that: They want to be able to look behind it and see the operating
data that lie behind those numbers, see the leading indicators, see
the non-financial performance indicators that management itself is
using increasingly to run the enterprise, things like customer satisfaction,
product and process quality, measures of innovation-those types of
Then, the last word in this five-part set is the word statements."
We're referring to general purpose financial statements. General purpose
financial statements means the information is not exactly what the
investors need, not exactly what the creditors need, not exactly what
the managers need, not exactly what the regulators need, not exactly
what the tax man needs. It's not exactly what anybody needs. It's
But today, we actually have the capacity to go in and find out what
we want on demand. This trick of summarizing a complex enterprise
in two pages, a balance sheet and an income statement, is a neat trick
we learned as accountants 500 years ago or so. It was a pretty good
trick when people could hardly come into the enterprise, thumb through
the journals and ledgers, and form their own impression of the enterprise.
But today, users can literally come in and thumb through the journals
and ledgers themselves. I don't mean with their thumbs, but with their
software. They have the ability to come in and express their information
demands and get them met in the format that they need, drill down,
and get whatever they want when they want it.
What I am saying is that this left-hand column is not a formula for
success in the future. In fact, it leads to something we might call
a loss of decision-information market share.
On this graph, what I show, over the extent of the 20th century,
is the information content of financial statements available to decision
makers. It has been going up somewhat during the century as a result
of higher standards, better accounting, better practice, and so forth.
Actually, those show a tailing off at the end of the century. That's
what I was talking about earlier. These financial statements don't
describe the Microsofts and the other post-industrial enterprises.
Looked at this way, the information content of financial statements
is declining. At the same time, we have other information. At the
beginning of the century, you would certainly need information outside
the financial statements to decide whether to commit money to the
enterprise as either an investor or a creditor, but a relatively large
percent of what we needed could come from the financial statements.
You always need some other information, but the financial statements
supply a relatively large part of what is needed.
As the century goes on, though, low-tech information intermediaries
emerged, people like Moodys, Standard & Poors, and Dun & Bradstreet.
Later in the century, you get an explosion of other sources of information
because of electronic databases now on line. So while the total information
that creditors and investors have is exploding, the piece that we
as accountants are involved in preparing and auditing is flat at best,
perhaps even declining, but either way, it's a loss of relative market
That's why I say we're facing a parlous present. Yet, I have the temerity
to tell you there is a great future in front of us. How so? How do I
First, there are some enormous megatrends in our favor. One megatrend
is the change from an industrial to an information or post-industrial
economy. We as the information people should be able to figure out
how to take advantage of the shift to an information economy. Unless
we're foolish or lack creativity, that megatrend actually operates
in our favor. A second megatrend is that all around the world, people
of every type are expressing less and less trust in institutions,
businesses, governments, and people. More and more, they want accountability
for the money they are investing or contributing, for resources managed
by others, and for relationships. They want to be told about what's
happening with their trusted inputs.
These demands for accountability express themselves in many ways,
but we as the accountability people should be able to figure out how
to take advantage of the trend. That's what we supply. If people are
demanding more of it, that's good for us.
The third megatrend is that information technology is making markets
so much more competitive. You have probably heard this comparison:
an Internet year to a regular year is like a dog year to a human year.
This enormously speedy change creates turmoil everywhere. That should
be good for us. We should be able to step in and help resolve the
turmoil by bringing some information discipline to it. What we have
to do is figure out how to harness these megatrends.
This cube represents the product of the revenue opportunities for
the accounting profession as we now see them. Let me describe its
three dimensions. First is a "who" dimension, meaning who
is it that we're serving, who are the customers that we're making
better off? The "what" dimension refers to what are we doing
to make the customers better off; what services are we providing?
Then there's a "how" dimension, which refers to the technologies
we employ in order to provide the services. In order to get into those
future opportunities, we need to figure out how to relax the boundaries
in each of those dimensions.
With respect to the first, or "who," dimension, we need
to appeal to a larger set of customers than we do as accountants and
management accountants. The people who deal with accounting systems
inside companies basically see their customers as the enterprise's
management. That's too narrow a set of customers. Every single worker
in a modern enterprise is an information customer who needs high quality,
up-to-date information. If we think of ourselves as financial accountants,
the people who prepare financial reports for investors and creditors,
then we see them as our customers. But how about other customers like
the enterprise's own vendors, and customers, and people, and regulators,
and Government, and community? We need to think about a much broader
set of customers we can serve.
Regarding the second dimension, the "what" dimension, we
need to think of a broader array of services, not just financial statements
but the full range of information, including on-line real-time information
and nonfinancial information.
On the "how" dimension, we need to rethink our technologies.
The technologies we use to prepare batch information and then audit
it after the fact is a kind of obsolete technology in many respects.
What we need to think about are new uses of technology that permit
us to generate much more information of higher reliability, available
on-line in real-time. So we need to think about the technology dimension
One of the nice things about this model being geometric and cubic
is that as you relax the constraints in each of the three dimensions,
the volume of opportunity is going up by the cube. That creates this
enormous opportunity space. Let's look at new customers, new services,
and new technologies, and I will illustrate with a service that the
accounting profession is rolling out right now-CPA WebTrust.
The idea here is that electronic commerce isn't taking off as fast
as people think it should. There is enormous capacity, but it hasn't
been realized. There could be billions and trillions of dollars of
commerce going on out there. Why isn't it taking off faster? You ask
consumers that question and they tell you, "Well, we really would
like to deal with these people, but we don't know it's a real company.
Even if it is a real company, we don't know if they will get the transaction
right, and even if they do that, we don't know that they won't misuse
our own personal data." So here's a service that addresses those
three dimensions. This is a bona fide company. There is transaction
integrity, and they won't misuse your personal data. You see this
on a Web page. It's a hot link. Click it, and you can see the accountants'
report and you can get to the methods that are used.
Here's an actual example from the Web for a company called Resource
Marketing. The WebTrust seal gives the customers assurance before
they put in their Visa or Mastercard numbers. You hit that link, and
you can drill down to a report. A small firm happens to have issued
this WebTrust seal. Notice that the criteria and assertions are hot
links, so you can drill down and find out more and more about them.
This product serves new customers-individuals doing business on the
Web. It's also a new assurance technology, not after-the-fact checking,
detection, and correction. It's looking at the systems to make sure
that they will produce these types of results in real-time for future
WebTrust illustrates that these opportunities that I've been telling
you about are real. The megatrends that I mentioned are strongly in
our favor. Clients and employers have information needs; we know that
from interviewing them. We found out that they are quite aware that
they are forced to deal with information of lower quality than what
they want and need. There were 90 cases of that. So they have the
needs that we as a profession can meet.
We have unexploited permissions. Customers would be willing to turn
to us for these types of additional services because they trust us.
They think we do good work. So we have unexploited permissions. That
creates the clear possibility of double-digit growth in the foreseeable
Now you're saying, "Yes, but you're having double-digit growth
now," right? But the double-digit growth that we're having now
as a profession is largely in consulting. What I am saying here is
that this double-digit growth can also be in the rest of the profession,
the part that's dealing with the production and auditing of information.
The question is, what do we have to do in order to take advantage
of these opportunities?
In order to explain that to you, let me focus for a few minutes on
a project that the AICPA has just completed. We were interested in
a future vision for the accounting profession-where we should be going.
We noticed that the Canadian Institute Chartered Accountants had gone
through a process to develop a vision for their profession in Canada
a year or two before we started this. We thought it was a great vision.
A year went by, and we checked back and asked, "How's it going?
Is your vision getting traction with your members in Canada?"
Answer: "No." They reject it. It's not theirs. It's forced
on them by the leadership and doesn't suit them.
So we said to ourselves, "Okay, top-down doesn't work; let's
try the opposite approach. Let's get a random sample from our members."
We did that in every one of the 50 states in order not to contaminate
the findings. We didn't put anybody from the AlCPA leadership in there.
We had outside facilitators. These people got together and came up
with a vision. If you're interested in reading it, it's on a Web site.
You can get as much detail as you like. A total of 177 member groups
evaluated the environment, the threats, the opportunities, where they
saw the CPA profession in the future, and how we were going to get
Let me tell you what we found. First, the 177 versions were boiled
down a little at a time until we got one national version representative
of what these 3,000 members said. They saw CPAs as the people who
can make sense of a changing and complex world. That's pretty broad.
That's a lot broader than people who prepare financial statements
and tax returns. It's general, at the 100,000-foot level.
What happens when you drill down to the 40,000-foot level and try
to put a little more shape to that? Here's what they said in their
vision statement for the year 2011: CPAs are the trusted professionals
who enable people and organizations to shape their future. Financial
statements might be a part of that, but lots of other things will
be a part of that as well because we want to do what helps people
achieve their future.
Combining insight with integrity, CPAs deliver value. They listed
four bullets: One is communicating a total picture with clarity and
objectivity. Second is translating complex information into critical
knowledge. Third is anticipating and creating opportunities. That
sounds a little more creative than what most people think of when
they think of accountants. And fourth is designing pathways that transform
vision into reality.
Let me take those four bullets and recast them a bit for you. I want
to start here with the information value chain. You have probably
seen this in some form or another, but here's the idea. At the left
end of this chain, we've got business events and transactions taking
place, but we don't know anything about them yet, so the first thing
we do is record them. Now we have data about them, and we can begin
to take a look at what happened. We take the data, refine and combine
it with other information, and we have more than data -- we have information,
information from the outside and so forth. That turns into knowledge,
and we use that knowledge in order to make wise decisions -- consumption
decisions or welfare, political, and social decisions. Any type of
So as you move up the information value chain, you get to higher
and higher value activity. The person who sits there at shipping,
taking down and recording things going in and out, creating data,
is earning what? Perhaps ten dollars an hour. That's what you get
for actually creating data. Then you move up to the 30 people who
get $100 an hour because they are transforming data into information
and refining information into knowledge.
Now let's take those four bullets that I showed you here and locate
them on this value chain. The first was communicating the picture
with clarity and objectivity. That's down here at this level. The
conversion of data and information -- good work, pays decent, but a
lot of that is being made redundant by technology. It's not going
to be great work too far into the future. The next bullet is translating
information into knowledge. That falls right here; that's higher value.
People who do that get paid more.
The third bullet is creating opportunities. That lies even further
up the value chain, and those people get paid even more. The fourth
is designing the pathways that permit people to achieve their vision,
and that's where you're up at the top of the value chain. So 3,000
members told us they aspire to move their practice up the information
value chain. We also asked, "What do you think are the core values
of the accounting profession?" These were the top five that they
listed: First, a commitment to continuing education and lifelong learning.
Second, competence. They think that whatever they are doing, they
must be highly competent at it. Third, integrity -- stands to reason.
The reputation of the accounting profession rests on people believing
that we have integrity, and that rests on CPAs having integrity. Fourth,
they list attunement to broad business issues, not just narrow green-eye
shade focus on the numbers, but a holistic view of the enterprise.
Fifth, objectivity, which is different from integrity. You can have
one or the other or both, but objectivity is the neutrality, trustworthiness.
So these are the top five values.
Now look at what our numbers showed as the services with the highest
potential in the future. The first one was assurance and information
integrity services. They extend the historical audit function, taking
in a much broader domain. The second is technology. They see technology
services as something that's really going to be high value-added and
demanded well into the future. Third, management consulting and performance
management. Obvious, right? The fourth is financial planning, helping
people to achieve their financial objectives. And fifth, they see
the world economy as global and see in that enormous opportunities
for international services, much more than we have exploited in the
Our members also identified the capabilities that CPAs would need
to have in order to succeed in taking advantage of the opportunities
they identified. Number one was communications and leadership skills.
Number two, strategic and critical thinking skills. You can't get
up the value chain if you're just thinking about the production of
debits and credits; you have to think strategically, the way the management
of the enterprise thinks.
The third needed competency is a focus on customer, client, and market.
We talked earlier about mass production, where the producer tries
to drive down the price and isn't too concerned whether the product
meets specific customer needs. Demassification is where you turn around
and face every problem from the customer's perspective. You have to
turn around and face the whole thing from the customer's perspective
or you won't get the right answer.
The fourth competency is the interpretation of convergent information,
by which they mean the ability to interpret both financial and non-financial
information. If you only see one side of the picture, you don't have
the full story. Fifth, you have to have high technology skills to
succeed in this environment. When vision-project participants talk
technology skills, they are not talking about the ability to run a
PC, do a spreadsheet, and make a Powerpoint presentation; they're
talking about a fundamental understanding of how technology reshapes
organizations, products, services, and markets, and about the risks
of employing technology and the ways in which to control those risks.
They are talking about business implications of technology, not just
the ability to run applications or deploy software. Those are necessary,
but not sufficient in order to succeed.
The vision-project participants mentioned obstacles to achieving
this vision-problems we have to solve and issues we have to deal with.
One is that we can't get anywhere if the customers don't believe we
can do it. So they held that future success would be based on public
perceptions of our ability and roles. The second issue is that we've
got to become as a profession much more market-driven than we are.
Third, we have to be less dependent on traditional accounting and
auditing services and focus more on high-value services like consulting.
Fourth, you can't face this marketplace as a generalist very well
in the future. You've got to specialize in some area. You need the
breadth to see problems as a whole, but you also have to have the
skills to be able to solve problems in some specialized domain. Fifth,
these CPAs are saying that as a profession, they don't think we're
sufficiently global in our perspective and outlook. That's an issue
So these are the things that our members are telling us. This is
not the leadership of the AICPA telling us what to do; it's the members
of the AICPA telling the leaders what to do. That doesn't mean that
if the AICPA does those things, the game is won, because other actions
are necessary as well. Some actions have to be taken at the level
of firms, both industrial firms and CPA practice firms. Since I am
in practice and I'm familiar with what we have to do in our firm and
firms like it, I'll focus on them.
The first thing that firms have to do in order to realize these opportunities
is to adopt a customer focus for the auditing product. The customers
are not only the clients, but the investors and creditors out there
who are the end users of the information. If we're not making those
people better off, we're not going to have much of a job in the future.
The second thing is that firms have to build competencies, particularly
in the technology area but in some others as well. The third thing
is that we have to take our existing product offerings and invest
them with higher and higher value. We have to make them more valuable
to the customers, and we have to show our customers and clients our
capacity to create value.
When they think of CPAs, we don't want them to think only of people
who prepare the financial statements and tax returns; we want them
to think of CPAs as the people who help them shape their future. Those
firms that don't have a research and development arm oriented to finding
out customer needs and creating service opportunities to fulfill those
needs will have to create one.
Big firms like mine can do that. We can have a big department that
does product development. Smaller firms, though, might have a partner
whose job it is to continually survey the pipeline of new product
and service offerings, to find out which ones are good for the firm,
and to help the firm take advantage of them. But one way or another,
each firm has to address this stream of opportunities aggressively.
Finally, it's not enough to study opportunities. You have go out
and perform these new types of services, because in the process of
doing this and serving customers, you get feedback and the feedback
will tell you what you're doing wrong and right. So study is good,
but action is better in terms of getting these things done.
Not only do firms have to do these things, but each individual has
to think about what he or she needs to do to prepare for this environment.
Each individual has to make the mental shift from a production side
to a consumption side, from the side of the person who produces financial
statements to the side of the person who consumes information. If
you can mentally put yourself in that person's shoes, then you can,
in fact, serve more capably.
It's much like riding a bicycle. You can read about riding a bicycle,
and you can watch videotapes about riding a bicycle. When you get
on a bicycle, you're going to fall over a few times, but when you
finally get the trick, you never lose it for the rest of your life.
That's the same thing here. When you finally get the trick of thinking
about everything from the consumption side, from the customer's side,
you will never again think about any problem other than from that
angle. It's something that you either have or don't have. If you don't
have it, you need to work on it.
Another thing that we need to develop is a more strategic perspective.
It's not something that's had a high position in accounting curriculums
or practice in the past, but it is something that I find that CPAs
have a latent capacity to do. It just hasn't been exercised very much.
When you take CPAs out of the grind of daily activities, they can
think strategically pretty well. So if you haven't done that yourself,
you need to do that. You need, obviously, to develop technology competence,
and, as I said earlier, that is much more than just the grammar of
being able to run PCs, networks, and whatnot; it's more the poetry
of knowing how the technology is used to reshape the business environment.
Finally, if you haven't done it, you need to make a commitment to
continuous learning because the information you have right now will
be totally obsolete in five years, if not less. If you don't have
an intentional learner's attitude, you're going to have difficulty.
Now, to begin to summarize, I've put the definition of accounting
from Webster's on a slide. Webster says accounting is the system of
reporting and summarizing business and financial transactions in books
and analyzing, verifying, and reporting the results. Does that sound
sexy or not?
Achieve the vision and we'll...
- Improve our position as information experts
- Contribute more to the economy
- Attract the best new talent
- Improve our standing as a profession in
- Serve the public interest
That's what Webster says, but I would submit to you that there's
a different way to think about it. I would define accounting as the
information infrastructure necessary for an organization to achieve
its objectives. It includes the system that generates financial information,
but it includes much more. If you can actually internalize that notion,
there is no upside limit to what you can achieve. You as an accountant
would become a person who enables an entity to achieve its objectives
through the strategic use of information and information systems.
If we can do all this -- if you and I and our firms and institutions
can do all this -- all sorts of benefits await us. We'll improve our
position as information experts; we'll make a bigger contribution
to the American economy; we'll attract new talent to the profession;
we'll improve our standing as a profession in society; we'll serve
the public interest much better than ever; and we'll prosper as well.