How To Make Accounting Cool Again

Give them a mini-MBA and a year of practical experience without compromising the core strengths of an accounting education.

The decline in number of undergraduate students signing up for accounting programs in US universities is alarming. Although we do not have an undergraduate program at Columbia Business School, the trend has affected us. For instance, it has become harder to place our PhD students into faculty positions in US universities. I also worry that the social stature of CPAs (certified public accountants) has suffered. I don’t have definitive data, but I would conjecture that we have far fewer pure CPAs (without an MBA or other degrees) as CFOs or directors on boards in the last decade or so relative to say the 1990s.

The wage gap

So, why do undergrads find an accounting degree unattractive? Like anything else, follow the money for answers. The Wall Street Journal reports that median salaries for 25–29-year-olds in accounting is around $56,000 relative to $74,000 for financial analysts. Some have suggested that this gap simply reflects the Big Four’s unwillingness to pay more and hence protect surpluses that partners get. Perhaps.

The alternate hypothesis, I prefer, is that the marginal productivity of an accounting grad for the Big Four has fallen over time whereas that of an engineering or computer science graduate has risen. Also note that the Big Four hire many students with engineering and data science backgrounds to support their audit staff. A partner at a Big Four firm I spoke to made this great observation that increasingly audit jobs are management jobs as opposed to a technical accounting job these days. The audit team needs to coordinate many specialists and service centers. They are under pressure to consult with experts. Said another way, auditing today is much less about accounting that it was when I started my career.

Others question whether the wage gap documented represents the full picture. A senior partner I spoke with said, “I don’t know where the earnings statistics come from, but every one of my friends in the profession is doing very well financially. In terms of pay, I don’t have any inside information. I would just say that everyone leaves the large firms for a raise and all the people I have stayed in touch with who used to work here are doing quite well financially. Perhaps another way to look at it is even the people who weren’t overly successful at the Big Four in my experience still say the experience was accretive to their career.”

My solution to this wage gap is simple: make accountants more like MBA graduates by giving them the skills to understand business context without compromising their core accounting foundations. My “fix” is informed by my teaching and counselling both MBAs and CFOs at Columbia Business School and Duke University and teaching undergraduates at the University of Washington and Emory for more than 15 years. Moreover, I am a chartered accountant myself who got trained in India 30 years back when the distinction between the accounting and finance job functions were not as watertight as they seem to be here in the U.S.

What can CPAs and accounting undergrads offer?

It is useful to think about what CPAs and accounting grads can bring to the table. The great CPAs and accounting undergrads usually have an amazing skillset – a solid understanding of how information flows in a business, how processes work, how money and value get handed off across different segments of the business, how to measure economic concepts and translate these concepts to practice informing decision making at the highest level. We need to make sure that the curriculum does not compromise the traditional strengths of an accounting degree.

Emphasize training accountants for business not just for audit jobs

I suspect much of the current undergrad curriculum is designed to train accountants as auditors. I am not sure audit is ever going to be a growth market. Presumably, audit firms have figured a way to audit their clients during Covid with fewer employees. That genie will never be put back in the bottle. Lower skilled audit jobs are either outsourced to nations with cheaper labor or automation and eventually AI will limit the number of audit jobs that will be created in the future.

Instead, universities are better off pivoting their curriculum heavily towards either consulting jobs with audit firms or other consulting firms in general and towards creating accounting talent for industry. This means we need to change the way financial accounting is taught.

Having said that, audit and tax will remain a steady state niche market for which schools need to produce students. Audit is rule-bound, partly because of regulation and partly as a way to stave off litigation. But audits themselves could benefit from students, who are less compliance-oriented rule heads, and more well rounded business students with a solid understanding of accounting, as mentioned earlier.

Build the business intuition behind financial accounting

I have met many CPAs and accounting undergrads who are basically rule-heads. They will cite how a rule in GAAP says this or that and swear by it. That’s not helpful. GAAP is at best a political compromise related to choices that a manager could have made on how to best reflect a transaction in the financial statements. Appreciating the choices that standard setters grappled with is arguably more important than what the eventual rule says. Awareness of minutiae behind rules is obviously important for tax professionals because their job is akin to that of a lawyer. But, worrying about minutiae of rules for accounting professionals reinforces the stereotype that accountants are rigid, over obsessed with detail and not good at strategic thinking. At the very least, train them to think about the choices and tradeoffs behind the rules.

Moreover, view financial accounting as a means to an end as opposed to an end in itself. When I used to teach undergrad accounting as a junior professor, all we did was teach accounting standard after accounting standard and how to account for various twists and turns of financial engineering incorporated into the standard by CFOs and auditors who wanted the FASB (Financial Accounting Standards Board) to incorporate explicit guidance for every idiosyncratic situation they faced in their business. For instance, we would devote hours to teaching how to account for leases with bargain purchase options, guaranteed residual values, unguaranteed residual values, direct financing leases, and sale leasebacks. Most undergrad students we taught had barely heard of a lease let alone all the bells and whistles we used to teach them.

We rarely had the time to teach students the conceptual foundation related to what a lease was, why it existed, and why the thousand permutations of a standard lease evolve in the real world to fulfil either real business or earnings management needs of companies. Often, students heard of a transaction for the first time in their financial accounting class.

Many did not know what a stock option was, for instance. We would teach them how to account for stock options and its various mutants (in the money options, variable and fixed options, performance-based options, non-qualified stock options, incentive stock options, excess tax benefits from stock-based compensation etc.). These are esoteric aspects of financial engineering that many finance professionals are unaware of. How would an undergrad completely unexposed to business and compensation practices critically digest this information?

Such abstract discovery of a transaction via financial accounting must stop. Teach students more about the transaction and why the permutations on such transactions evolved. This involves an MBA like core and electives program filled with micro and macroeconomics, asset pricing, corporate finance, applied statistics and optimization. A deeper background in the intuition behind the permutations of a transaction will make it easier to teach students about how to account for such permutations.

In my preferred version of the new curriculum, we could start with questions we teach in a high school economics class related to (i) production function of a firm; (ii) its demand and supply curves; (iii) price elasticity; (iv) consumer and producer surplus; (v) consumer indifference curves; (vi) production and cost functions; (vii) the market structure the firm faces; (viii) wages and employment related to the firm; (ix) how interest rates and market for capital affect the firm; (x) and close with a discussion of natural capital, taxation and lobbying.

Then, take these ideas to a modern financial statement describing a firm’s performance and appreciate how woefully inadequate the financial reporting model really is for our multi-billion-dollar market cap companies.

We also need to teach students to recognize that we can never observe the economic income a firm makes. All we can do is to start with the elementary idea in high school economics that firms combine materials, labor, capacity and managerial talent in unique ways to create value. Financial accounting is the lens via which an outsider can understand how an individual firm achieves the power to earn persistent differential returns relative to its competitors.

Learn statistics and limitations of data

One of the most useful skills I learned in my PhD was how to cut data to draw meaningful insights. The flip side to this, of course, is that data in irresponsible hands can be used to support virtually any inference you want to draw. I often joke to my students that, with statistics, I can show you that the sun rises in the west!

Most undergrads in accounting that I know of are good at micro transactions but not at macro or large datasets. Often, they have taken one theoretical class in statistics where the instructor gives them manicured datasets to teach them how to run a regression. The data in the real world is a mess, imperfect and is subject to both idiosyncratic error and systematic bias. But adequately cleansed, data is liquid gold. Data gathering and interpretation jobs have increasingly gone to data scientists, who suffer from the opposite problem. They know statistics but not enough about business context.

The right people to work on business intelligence should be accountants. Data aware accountants can better supervise data scientists as such managers can hopefully zoom out to understand what business hypotheses to pursue, what data might we have to measure the dependent and independent variables and what might the limitations of such data entail with respect to measurement error and causality. In a world of big data, accountants should have become more relevant not less.

Make them tech aware

Increasingly, information flows in computer systems not via paper vouchers or paper invoices or paper ledgers. To appreciate information systems, accountants need to be able to understand APIs communicate with systems, where is the data kept in a cloud, and how data connects from one system to another.

Back in the day, at Citibank India and Singapore where I worked, accountants usually made the best project managers. They used to serve a go-between the developers or the tech side and the businesspeople. That’s because banking is all about taking care of micro transactions where your stock in trade is money. Sit on it and you owe the customer interest for delayed payments. Pay it off too soon and you have lost the ability to make money off float. Banking is also about risk and yield management. These are skills that come naturally to a good accountant. Moreover, accountants can think at the level of granular detail that developers need to engage with programs. Good accountants can zoom out and understand flaws in internal controls and processes that can expose the bank.

Insist on a rigorous minor in either economics or finance or computer science

A practical way to incorporate the skills I refer to is to insist that accounting undergrads get trained rigorously in a minor area such as finance, or economics or law or computer science. By rigorous, I mean you take all the classes that someone majoring in that sub field would take in that area. Perhaps the standard for passing the class could be a bit lower for the accounting major.

Ability to zoom out and synthesize

We also need to teach accountants how to zoom out of the detail and make sense of what the micro data means for where the firm is going.

This is almost akin to how macro economists consider various signals such as GDP growth, unemployment, market interest rates, housing starts and like to forecast where the economy might be headed. The job of an analyst using financial accounting is to understand how the firm creates a competitive advantage is arguably easier than that of the macro forecaster. But the emphasis in training should then move to teaching students about the firm’s economics, its durable barriers to imitation, what faulty measurement of the firm’s production function can tell us about its future and understanding the power and limitations of data related to the firm’s prospects.

Train everyone in accounting

Everyone who will enter the business world needs to take accounting. They need to know what revenue is, what is cost of goods sold, the difference between capex (capital expenditure) and opex (operating expenses) and so on. Engineering managers are now responsible for large cost centers in say AWS, Google Cloud. They need to know what should be capitalized, what is expensed, how much of the developer’s time is capitalizable or not, what is maintenance capex or how much they need to spend on developers to create products that will at least help the firm retain its market position.

I have heard CEO with a liberal arts backgrounds say things like, “why can’t we simply book next year’s revenue now?” I have heard a CEO with a marketing background say, “we give the customer what she wants. Investors are like customers. Give them the earnings number they want.”

It’s almost unthinkable for anyone going into business to not get exposed to economics. Accounting should be a close second to economics in training future business leaders.

Get entry undergrads into FP&A jobs

FP&A (financial planning and analysis) jobs tend to be dominated by MBAs in corporate America. What comparative advantage do MBAs have over accounting graduates or CPAs? At the risk of gross simplification, I would suggest that MBAs dominate in understanding business context and communication skills. MBAs are usually good at visualization packages such as Tableau, database software such as SQL. These tools are not hard or complex to use and understand. But undergrad accountants are not exposed to them.

Add a year of field training

My Chartered Accountancy degree in India entailed a three-year clerkship. We were required to spend two years training with a public accounting firm and one year with a company as an industrial trainee. I learnt more in those three years than anything my thick accounting and law textbooks could ever teach me.

In that spirit, I would encourage accounting undergrads to serve at least a year in business as an intern. Business education without a background in applied business is theoretical at best and dangerous at worst. Most undergrads that I have taught in my earlier life had never seen an invoice or a purchase order or a contract. Most were not aware of power structures in an office or how inter-personal dynamics at offices worked. Most did not know what work as an accountant entailed and whether this was the right career path for them. A year of apprenticeship in industry will resolve many of these deficiencies and make them better students of business and of accounting.

Teach true integrated reporting

A related suggestion is to attract more non accounting students into accounting by teaching them integrated reporting and an intersection of values and value. The field of ESG has become unfortunately politicized but as I written many times before, most ESG problems are business problems. The ESG field is also badly in need of translators: folks who understand some climate and engineering who can talk with the accountants, bankers, finance and control type executives. Often, these skills are developed in silos, even in universities. Perhaps, true inter-disciplinary integration of sustainability issues, with a sharp focus on E and G and the portion of S that emphasizes financial returns in the long run, is a huge growth area for accounting groups.

Finally, a few important incentive issues with universities that I have saved for last.

Success in the CPA exam is not the same as a successful undergrad program

At least a couple of senior partners I spoke with raised the issue that many top and mid-tier undergrad programs seem to equate success in the CPA exam with success of the teaching faculty and the program. As a result, faculty end up teaching to the CPA exam as opposed to making the students ready for the workforce. This has to change.

Coming back to the other recommendations I have made, entrenched change averse faculty will raise many objections related to why these ideas are not implementable or how to share revenue between different areas of the B-school etc. This is an opportunity for deans and department heads to lead schools in a bold but compassionate manner to a different future. It is better to rip the band aid off now to save us from extinction later.

Summary

To summarize, I believe we need to give undergrad accounting majors a greater understanding of how business works — the economics of the business model, the sources of inimitable competitive power of the business and the theory and practice of corporate finance. Train them to zoom in to the detail, which they tend to be good at anyway, and the skills to zoom out and make sense of where that detail or building block fits in with the bigger picture and how that piece of detail fits with where the strategy of the firm is headed.

This recipe, I believe, should make accountants more useful to their employers and increase the wage rates they attract. In essence, make accounting cool again.

Constructive comments welcome, as always.