The New Talk in Town is Data Analytics, Machine Learning
By CPA Faustin Mwinzi
The law reinforces the role of accountants in society. Financial audits are mandatory for both public and private entities in numerous jurisdictions. Before an audit, accounting records and financial statements must be prepared, a task entrusted to accountants. Therefore, as long as these laws exist, the roles of accountants and auditors remain essential.
At this level, accounting is clearly defined by legal frameworks, governed by standards, and is highly structured. Regulatory bodies typically favor standardized reporting to benefit all stakeholders. Consequently, the accounting profession adheres strictly to these regulations. Financial statements must conform to prescribed formats regardless of stakeholder expectations or accountant expertise. This type of accounting, primarily aimed at meeting regulatory requirements, can be termed Compliance Accounting.
That said, the accounting profession has expanded beyond strictly regulated financial reporting. Over time, it has evolved to offer value-added services not necessarily driven by regulatory frameworks. Non-audit services span from bookkeeping, tax advisory, and business consultancy to transaction advisory.
Historically, the primary focus of accounting firms was providing audit services. However, compliance-based services are gradually losing dominance in firm performance. A 2021 survey by the Thompson Reuters Institute, covering 315 audit firms in the USA, revealed that firms relying more on audits and reviews tend to be less profitable. The study indicates that firms increasingly charge more for non-audit work while reducing their focus on audit engagements. This trend is attributed to clients exerting downward pressure on fee for audit and review services, which they perceive as operational necessities rather than strategic value-additions.
Public Company Accountants Oversight Board (PCAOB- US) notes that since 2011, advisory services’ prominence has risen while audits have declined. To provide some perspective, audit revenues represented 70% of the firm’s total revenues in 1977, 34% in 1998, and about 30% in 2000.
This shift is evident in the performance of leading global audit firms. In 2013, the Big Four audit firms relied on audit and assurance services as their leading revenue source. By 2023, however, revenue from advisory services had surpassed audit and assurance across all four firms.
Source: Statistica
Nature of Advisory services
American Institute of Certified Public Accountants (AICPA) defines advisory services as those services where the practitioner “develops findings, conclusions, and recommendations for client consideration and decision making.” The sea of advisory services is vast and undefined. Accountants apply their business acumen to help clients navigate challenges by devising strategies and tailored solutions.
Accountants are emerging as lead advisors in tax planning, technology adoption, strategic planning, baseline surveys, financial forecasting, management reporting, resource optimization, analytics and performance indicator dashboards, transaction advisory, financial due diligence, forensics, restructuring, governance, risk and compliance, and many more finance-related services.
In the Kenyan scene, data from the Institute of Certified Public Accountants (ICPAK) indicate a stronger preference for non-audit services when compared to audit and assurance services. Excluding the composite license category, which has a significant majority of 1,009 out of 1,062 practicing members, the accounting, controls, and consulting license is the most popular. This category is three times more attractive than the Audit and Assurance category.
(Excludes the composite (C) category with 1009 Licensees)
Source: ICPAK list of practicing members July 2024.
The Future of Accounting Profession
Accounting advisory services in its simplest form take the shape of bookkeeping, which involves recording financial transactions and generating outputs. In the past, the focus has been on providing bookkeeping services, preparing tax returns, and managing payroll. However, business leaders are now seeking deeper insights into their financial results, creating new opportunities for CPAs to leverage their experience, advisory skills, and unique perspectives to offer a higher service level and expertise.
Traditional accounting is historical, concentrating on reporting past performance, filing tax returns for previous periods, and complying with regulatory requirements. In contrast, advisory services are more forward-looking, offering business leaders valuable information to make better decisions and mitigate future risks.
The need for advisory services is demand-driven. The business environment is rapidly changing, influenced by technological advancements, increased consumerism, employee rights, unpredictable competition, and sustainability concerns for the planet. This is to say corporate leaders have bigger worries than celebrating past results.
The field of accounting Consultancy services is fast mutating to match the above concerns, covering a wider scope beyond the typical training and orientation of an accountant. The profession is evolving into the following areas:
Technology consultants– Perhaps it may be easily said that accountants are not computer technology gurus, but information technology is a means to some end. The accountant knows that end better. The accountant understands the input that needs to be captured, the authenticity of source documents, controls in a process, the timing of reports, the audit trail to be maintained, and the volume of data to be handled. Accountants are instrumental in offering guidance to their clients in adopting accounting software, cloud storage, collaboration solutions, automated data entry tools, process automation, and many other emerging technologies. The future technology is already here, and professional accounting firms may explore the options of, collaborating with IT consultants or creating in-house IT departments.
Data storytelling- Does technology spell doom or gloom to the accountant? It depends on their orientation but one thing is for sure, the era of manual data entry is gone. The new talk in town is data analytics, machine learning, machine learning, predictive and generative AI, there will be a new one by the time this article is published. Accountants become the human element in this era of data explosion, they are the storytellers. They know which information to query from databases, how to interpret dashboards, and how to make financial sense from non-financial data. Analytics will draw a line between accountants.
Climate Consulting
Greening the planet might appear to be a far-fetched matter in the world of environmental science, but there are figures tied to computing carbon footprints and claiming carbon credits. Notwithstanding the science behind carbon accounting, accountants have a vantage view of an organization’s value chain and can advise on potential risks and opportunities for mitigation. Accounting firms remain trusted business advisors and are probably the only professionals that small businesses interact with.
Climate consulting is not new to accounting firms. Since the turn of the millennium, large multinational firms, including PwC, KPMG, and McKinsey, have established environmental advisory arms. The strategic importance of climate consulting is evident in the investments these firms are willing to make. For instance, in April 2022, Deloitte announced its plan to invest $1 billion in its sustainability and climate practice, while in 2021, PwC indicated that it would spend $12 billion over five years for the same purpose.
Implications of Changing Dynamics in Accounting Services
The accounting profession has a great future, but that future is like the horizon that keeps moving. Unlike audit and tax advisory services, which are territory-specific, the emerging frontiers open up the accounting profession to the rest of the world. This implies Kenyan firms can offer services abroad, conversely, foreign firms can bring their services to our doorstep.
One big question we must ask ourselves is, can our local firms compete on the global stage without the regulatory protection that covers compliance accounting?
The writer is the Director, Professional & Technical Training Institute
KCA University
