The new finance: new technology is challenging the accounting profession to redefine itself.

Recent advances in information technology--evidenced by the widespread use of personal computers, powerful off-the-shelf software and easy access to even the most remote financial, production and marketing data--have changed the way business is conducted and the way accountants work. There is reason to believe that even more dramatic changes are about to occur.

Most of the changes that businesses have implemented so far have been based on paper-oriented, precomputer thinking. Some business thinkers, while not totally abandoning yesterday's precomputer methods, are starting with a clean slate, rethinking and reengineering the way enterprises conduct business--from monitoring production and tracking inventory to issuing invoices and calculating taxes. Further, they believe many current accounting and reporting practices no longer are relevant. They are concerned that if the accounting profession doesn't reinvent itself, it easily could be pushed to the sidelines--perhaps even be replaced by a profession that has yet to emerge with an entirely different vision of how information, analysis and attest services should be provided.

Other members of the profession, though, say the traditional practice of accounting and management reporting not only won't change but also doesn't need to change. They contend the time-tested concepts of feeder systems and transaction journals, debits and credits, ledgers, cost accounting, closing cycles, on-site auditing, noninteractive printed financial statements, analyses and the resulting management reports will continue to fit all the conceivable needs of business long into the future.

While these may be extreme points of view, there is no doubt that major changes already are taking place. As Labor Secretary Robert Reich said, "Companies are making cuts in the name of faster decision making and increased productivity .... The forces prompting the trend ... are increased global competition and the advance of computer technology, which has reduced the need for layers of middle management in large corporations because much of their role was gathering, analyzing and dispersing information--tasks made easier and less laborintensive by personal computers."

How will these changes affect the accounting profession and, more specifically, CPAs' roles and traditional accounting practices? This article explores these questions, and while readers may not agree with every aspect of the analysis, it's hoped the article will prompt the profession to examine the issues being raised.

MANAGEMENT EXPECTATIONS

Accounting and management reporting traditionally have focused almost entirely on information about an organization's past events, even though such information often is so old it no longer has meaning. In the 21st century, managers surely will expect more timely information. For example, a business accustomed to real-time transactions and network computing no longer may have use for six-week closing cycles, after-the-fact hard-copy analyses and noninteractive paper reports. Forced to compete with smart, well-financed global competitors, managers increasingly will refuse to steer their businesses by looking only through the rearview mirror of historical performance. They will expect and demand real-time knowledge of what is rather than what was.

Business leaders will be asking: How much are we selling today? What is in inventory today? How much does it actually cost to make a product at a certain level of production? How much are we producing today? How much are we earning? What should we do differently tomorrow?

In response, one must ask how a profession with its information stock-in-trade squirreled away in journals, ledgers, workpapers and "adjustments" can provide most efficiently the information requested. Clearly, traditional approaches to information management must be rethought if accountants are to meet the new information challenges of the 21st century. To be sure, traditional accounting practices probably will not disappear. But if they cannot be modified to fit an enterprise's new needs, they will become obsolete.

LOSS OF CONTROL

As the gap widens between managers' information needs and traditional management reports, many managers are taking matters into their own hands. As a result, many companies now support two, often irreconcilable, sets of books: (1) an official accounting system consisting of traditional accounting records and controls and (2) an entirely separate, informal information network put in place by managers who don't believe they will ever get the information they need from the formal system. These "bootleg" systems increasingly run on desktop computers with spreadsheet software and typically can share information throughout an organization over local and wide area networks. Such information almost always is distinct from the data flowing into the official accounting records.

The control and attest risks inherent in dual information systems are obvious. Often bootleg systems are put in place without professional attention to proper business or internal controls. At the same time, bootleg systems may compromise management accountants' roles as advisers and partners in decision making. Such systems contain information essential to determining a business's financial condition that is not available in the official accounting records. Additionally, they often are managed better by operating personnel who depend on them to execute transactions and make business decisions. As operating managers collect and maintain more and more financial data, CPAs risk being excluded from running the business and may become responsible only for documenting its history.

In addition, CPAs face the even greater risk of violating management's unofficial creed that there be "no surprises." With key business data buried in parallel information systems--over which management accountants have very little control--it is only a matter of time before a crisis occurs. Often, such a crisis is heralded by an angry cry by an organization's executive committee or board of directors: Who has the right numbers? In such cases, the chief financial officer, chief accounting officer and outside auditors are put on the hot seat.

Accountants often work with, and even around, these new information approaches, but how long will management be willing to tolerate the combined cost and management and control hassles of maintaining multiple information systems--especially when they supply contradictory information?

The accelerating trend to deploy even more sophisticated computers, network systems and software application programs--designed to empower workers and speed business transactions--will only exacerbate the challenges faced by accountants.

PROFESSIONAL FOCUS

In the past, businesspeople saw CPAs as experts on business systems, internal controls and management information systems and empowered them accordingly. After all, if CPAs were to report and attest based on the internal controls and management information systems, they expected to have ultimate control over most transaction processes; internal control systems and procedures; financial records; measurement and reporting content, format and systems; and, in most companies, the planning and budget systems that supported them.

Historically, permitting the accounting "tail" to wag the business "dog" was acceptable because management viewed such functions as mainly back-office activities that were not essential to an enterprise's competitive position. As competitive advantage is achieved through cost-effective business processes and the skills of people empowered through their access to real-time decision-support information, however, the accounting back office needs to be relocated to the front lines.

A vibrant and viable accounting profession, able to meet very real competitive alternatives for what it does, must respond to this challenge. The profession must reinvent its standards and its skills to match management's changing needs and expectations. Change, however, always involves losing something, to be replaced with something more responsive to current realities. For example, maintaining conformity with generally accepted accounting principles and the consistency of internal accounting controls no longer are the only reasons for the profession's existence. To meet new management needs, these traditional responsibilities must coexist with new and equally important responsibilities to provide management with information it needs.

Accountants also must address a troubling development: Some of the traditional accounting practices and services actually have evolved to produce misleading information that could induce managers to make the wrong decisions. Increasingly, senior managers complain that some management accountants are keeping their businesses from doing what they must to succeed and survive. For example, accounting systems and practices at some companies calculate overhead costs that don't reflect the actual activities incurring the overhead. Additional examples can be found in areas such as planning and budgeting, responsibility accounting, analysis and allocations, performance measurements and management reporting. Sadly, many accountants have little understanding of the core competencies or strategic intent of their clients--further exacerbating the problem.

SEEING THE OPPORTUNITY

Management accountants' responsibility for controlling business information should be as simple as gaining access to the right information and making it available to the right people. The real obstacle may be an out-of-date accounting model for how the process should be accomplished. Traditionally, accountants saw the ledger and then the accounting data center as the place to compile data for dissemination to all parts of an organization. For many, the model looked like an hourglass, with data in the top half flowing to the bottom half through a narrow neck. In the past, the neck served a critical control function: CPAs made sure raw data were correct and were distributed to a select group of decision makers. However, as information needs grew more complex and real-time data collection and distribution became possible, managers needed so much information so quickly that the neck became an obstacle to decision making.

Having responsibility for managing and correcting data gathered and disseminated throughout an organization proved time-consuming and costly. As accounting budgets consumed greater shares of revenue, CPAs began to ask: What will it take to get the data right the first time--when the original transaction occurs? Can we do this using shared-service accounting centers on a network rather than by placing accountants at every work and transaction site?

At the same time, and in spite of increased accounting head counts, lines of managers grew at management accountants' doors waiting for business information that CPAs either couldn't supply or couldn't provide quickly enough. That's why operating managers set up bootleg information systems in the first place.

MEETING THE NEW NEEDS

Business schools regularly discuss how Japanese businesses came to dominate so many industries in the United States partly by exploiting the shortcomings of traditional cost accounting and reporting practices. Even so, systems designed to correct these shortcomings, such as activity-based costing and activity-based management, still are not in general use. Cost accounting is only one of many areas where businesses are demanding new capabilities and new services from the profession.

The list of areas that must change to meet these demands is long. In most companies it begins with the way transaction and accounting information is collected, recorded, stored and accessed. It extends to how raw data are processed into meaningful information and how that information is analyzed, reported and distributed throughout an organization. Finally, it includes the tools and techniques CPAs have developed so their employers can gain access to the information needed to perform their own independent analyses.

There are a number of reasons why new accounting capabilities have not kept pace with management's needs. One has to do with the trap of traditional thinking about how accounting data and information should be managed. For example, in this age of relational databases that can almost instantly slice and dice data from multiple perspectives, the idea that the ledger account should be the source of management reporting clearly is out of date. If the ledger continues to be used by future accountants, it should be only one of the places in which an enterprise sorts its data (stored in its computerized data warehouse).

Undue reliance on traditional thinking also has lulled many companies and their management accountants into neglecting to develop a modern finance and information system architecture. Without such an architecture, most companies find themselves hopelessly bogged down with a patchwork of systems trying to provide reporting capabilities they were never designed to support.

Finally, many accountants continue to validate their roles and power in organizations by defending their old turf: the neck of the hourglass that's become a bottleneck.

Aside from the public reporting and attest functions, almost everything accountants do is subject to serious and growing competition. Currently, competitors include consulting firms, software vendors, computer companies, financial advisers, tax and payroll services and industrial and systems engineers. In the future the list probably will include outsourcing vendors as well as credit, networking and communications companies.

As accounting skills increasingly are pigeonholed in a traditional paradigm, a growing number of companies have made it policy to hire MBAs and other business majors rather than accounting majors for what traditionally have been accounting positions. This development suggests there is a mismatch between the needs of business and the skills of accountants. During a time of great need for financial talent to manage massive economic change and to restructure companies, one would think accountants would be the candidates of choice. The accounting profession needs to upgrade its practices and skills to reflect where the world is going, not where it has been.

Fortunately, the challenges facing the accounting profession actually are opportunities to provide even more value-added services for substantially increased rewards. To earn these rewards, the profession must reinvent itself It must embrace a new vision that fully addresses management's future needs.

EXECUTIVE SUMMARY

* FROM ITS ORIGIN, accounting and management reporting have focused almost entirely on an organization's past events, although the information collected sometimes is so old it no longer has meaning. In the 21st century, the business community surely will expect more timely information.

* TRADITIONAL ACCOUNTING practices probably will not disappear, but if they cannot be modified to fit an enterprise's new information needs, they may become obsolete.

* THE PROFESSION must reinvent its standards and skills to match the changing needs and expectations of its employers and clients.

* ACCOUNTANTS WILL have to address a disturbing development: Their traditional practices may produce misleading information.

* FORTUNATELY, THE PROBLEMS and challenges facing the accounting profession actually are opportunities to provide even more value-added services for substantially increased rewards.

BENCHMARKING: A NEW ACCOUNTING TOOL

How competitive is your company's or client's finance department? Does it use outmoded accounting procedures that are not cost-effective?

One way to measure their efficiency and effectiveness is through benchmarking--a tool for identifying areas that need improvement by comparing their performance with that of other organizations.

The American Institute of CPAs, through the Hackett Group, a management consulting firm based in Cleveland, provides accounting and financial benchmarking as a free service to members. Companies with at least $50 million in revenue are invited to join the over 300 companies participating in the study.

Depending on the size of the organization and whether its accounting function is centralized or decentralized, compiling the necessary data takes three to five days spread over a four- to six-week period.

After the data are compiled and analyzed, a confidential report is sent to each participant. The 13-page report provides an average for all companies in the database plus the results of the "best" company in a particular area. No one company is the best performer in all areas.

After receiving the report, a company may tackle the problem by itself or share the report with consultants or others who can help it do so.

JOHN S. FISHER, CPA, is managing director and dean of Digital Equipment Corp.'s Finance Institute in Maynard, Massachusetts. A member of the American Institute of CPAs management accounting executive committee, he served as executive assistant to Digital's president and as chief financial officer of the general international region.