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Top Firms Roundtable: Getting Ahead of Disruption

 

Like last year, technology discussions dominated the VSCPA’s annual Top Firms Roundtable, held Nov. 9 at the CPA Center in Glen Allen. But as the panelists pointed out, technology disrupting the way business is done is hardly a new phenomenon.

“One hundred and twenty-five years ago, Sears & Roebuck invented shopping at home,” said Stephen Custer, professor of supply-chain management and analytics at Virginia Commonwealth University. “The technology they used was the U.S. Post office and the iconic Sears catalog. They leveraged that to be the largest retailer in the world for many years.

“Today, Sears is bankrupt. Amazon, which didn’t exist 25 years ago and couldn’t exist 25 years ago because the technology wasn’t there, is the second-largest retailer in the world.”

Custer led the session “Rise of Data Analytics” with VCU colleagues Lindsay Andiola and Paul Brooks and used a familiar truism to illustrate how rapidly that rise has occurred. He cited Moore’s Law, in which Intel founder Gordon Moore stated that the amount of computing power one can buy for uninflated dollars doubles every two years.

“In your pocket, on your desk, maybe in your hand is a device that will allow you to communicate with almost anybody anywhere in the world at close to the speed of light for close to zero incremental cost,” Custer said. “You don’t have to think too far back to a time when if I had told you about that, you would have said I was crazy for thinking it. And we take it for granted.”

But here’s how prescient Moore was: He coined the law in 1965. Again, disruption is nothing new. What is new is the sheer volume of data, which can make the task of separating signal from noise daunting at best and impossible at worst.

“What’s new about it is the availability of data, new kinds of data and amount of data, and the new hardware and software platforms to address it,” said Brooks, also a professor of supply-chain management and analytics. “The time and resources that are needed to store and collect the appropriate data for an analytics project is always underestimated.”

Custer cited Parkinson’s Law, a variation on the ideal gas law that states that work expands to fill the time available for its completion. He pointed out that the availability of larger and larger amounts of storage and work capacity has allowed the business community to hang onto any and all data without regard for its usefulness — or, as he put it, “We don’t empty our wastebasket anymore, we just buy a bigger wastebasket.”

“Big data is something of a cliché, but it is a cliché with meaning,” he said. “Ever since Gutenberg invented the printing press, we’ve been collecting more and more information, growing exponentially.

“But what’s happened in the last several years is not exponential growth. It’s been a quantum leap. It’s common today to talk about databases of a million records with scores of fields. It’s not that uncommon to talk about databases with a billion records.”

Those issues don’t mean the titular rise of data analytics hasn’t helped solve similar problems. Notably, as discussed in last year’s Top Firms Roundtable, analytic technology has helped reduce the need for the random sample in audits.

“We want to go through a series of transactions to detect fraud and identify errors. In the current paradigm, we can’t go through every record, so we sample, and that’s a wonderful thing and statisticians around the world applaud you for sampling,” Brooks said. “In the analytics paradigm, if these transactions are digitized, we don’t have to sample anymore. We can use analytics to inspect every transaction.”

The use of technology to perform (and improve) audits has obvious implications for the work CPAs do. Many of the tasks currently performed by entry-level accountants can, and will, be automated. While this is a threat (and a key driver of the VSCPA2025 strategic framework released in 2017), the new levels of information unlocked by data analytics present a massive opportunity for CPAs to rethink the services they provide.

“Many, maybe most of the things you’re doing today, you won’t be doing in the future. They will be done, but you will not be doing them,” Custer said. “However, here’s the opportunity: You will be doing the same thing you’ve always done — giving investors information so they can make better decisions. That’s what the basic job is, and that’s what it will continue to be. But you’ll be doing it in very different ways, and more importantly, you have the opportunity to do it at very different levels.”

Audits get most of the attention regarding data analytics in accounting firms, but that’s just the tip of the iceberg for the usefulness of the technology. Tax departments can use large data sets to uncover trends and potential issues within its operations. Analytics can help businesses quantify and model risk.

Brooks described analytics as simply leveraging data to support decision making. He broke the main uses down into three categories:

  • Descriptive (summarizing and exploring data)
  • Predictive (developing forecasts for future outcomes)
  • Prescriptive (identifying decisions that need to be made to achieve goals and desired outcomes)

“At a lot of the bigger firms, they’re using these data scientists as specialists in all different ways across their practices rather than having them be an audit staff member,” said Andiola, an accounting professor.

Whichever function they’re serving, data scientists use modeling to peek into higher dimensions and search for more complex relationships than might be obvious in simple visualizations. Their usefulness across a firm makes them a priority in hiring decisions at analytics-minded firms.

What’s more, those scientists aren’t always CPAs. The VSCPA has covered the implications of that fact in two issues of Disclosures magazine this year — first covering how colleges are responding to those hiring trends (May/June) and then how entry-level skill sets are evolving (September/October). Universities are diving into analytics in different ways and to different degrees, with Virginia Tech partnering with KPMG to create a new master’s program in data analytics. VCU has added a concentration in data analytics to its own master’s program, in addition to looking at all its undergraduate accounting courses with the goal of incorporating technology as much as possible.

“We’ve started to incorporate data analytics and technology skills into accounting courses across our curriculum,” Andiola said, “so that at the end of undergraduate, they feel comfortable with a variety of technologies and are more likely to be able to pick up from that. We’ve shifted our master’s program to be a master’s in accounting with a concentration in data analytics. You have to take that in order to complete our master’s currently.”

Andiola said that numerous universities are going that route to increase the value of the master’s degree, pointing out that analytics courses are more useful to students than filling the extra 30 hours required to sit for the CPA Exam than electives like ballet.

“I tell my undergrads that if they want to be more valuable to firms, they need to be taking classes that align with the skill set they need,” she said.

Custer added: “A student who doesn’t have an understanding of what analytics can do and how to do it is going to have trouble in the marketplace.”

The Intersection of Audit and AI

Two VSCPA members from Ernst & Young in Richmond expounded on the topic of robotics and automation in the afternoon session at Top Firms. Partner Kyle Harkrader and senior associate Bryan Wilson, CPA, discussed their firm’s efforts to position itself as a leader in robotics technology for its clients. That effort started at home, and the focus has been on finding opportunities to move beyond traditional CPA services.

“We have truly been our own guinea pig,” Harkrader said. “We have 700 bots in production globally. We have freed up 200 million hours of productivity. We’ve been on the journey for a couple of years now. And what we’ve done with those hours is to try to focus our resource time on value-added activities.”

Those value adds come from both those higher-level services and in better outcomes provided by the robots. Wilson pointed out that if he (instead of a robot) performs an audit of a company with $1 billion in revenue, he can only cover $20 million of that in his sample instead of having the assurance that 100 percent of the sample is being used.

“With the stuff that we’re doing, we’re saving time, reducing error rates and getting smarter stuff,” he said.

He added: “One of the common misconceptions from our clients is, ‘Oh, you have this tool that does this for you now, I can cut your fee by 25 percent.’ There are interesting conversations you need to have. It’s a value.”

Harkrader said that robotics can be implemented anywhere within an organization that involves repetitive, rule-based processes. Data handling, particularly aggregating and comparing data, is a particular sweet spot.

Automation of those tasks is nothing new. Chances are, your own organization has been utilizing a form of automation for years in the form of scripts or macros. Robotics can offer even more of an advantage because it works at a high speed and requires very little integration with existing systems.

Firms can benefit even more by re-deploying talented, educated employees from lower-level tasks.

“We had a tax attorney pulling invoices on an audit,” Harkrader said. “That’s not the best use of someone with that level of education. We’ve seen an increase in retention because of this.”

It doesn’t hurt that the relative cost of bot implementation has become more affordable. Generally, businesses can expect to pay a license fee of around $10,000–$15,000 per year, in addition to the cost of maintaining the bot. Or they can take on more ownership of the bot and use a company like EY to help them use it most effectively.

“I have a lot of clients who procure their own bot. I just help them configure it,” Harkrader said. “In some cases, they want to be self-sufficient and help people get trained up on the technology so that when they scale up, their business users and IT can maintain the bot.

“If a client does not want to procure a bot themselves, they can use one of our licenses because we have 1,700 of them. We would allow the client to use our license in their environment. The data would not be owned or controlled by EY.”

The Latest on Tax Conformity

At the beginning of the day, VSCPA Vice President, Advocacy Emily Walker, CAE, joined legal counsel Patrick Cushing from Richmond firm Williams Mullen to discuss the VSCPA’s legislative priorities for the 2019 Virginia General Assembly session.

The 2019 session is a massive one because of the issue of tax conformity, which was complicated by a wave of new legislators now finishing up their first year in office and, most notably, the passage of the Tax Cuts and Jobs Act late last year. The VSCPA issued a whitepaper, “Virginia Tax Conformity: 2018 and Beyond” (PDF), but is still working to raise awareness on the issue.

“There is a lack of understanding of what conformity really is,” Walker said. “Our paper really focused on the definitions, but there’s a perception that by conforming, we bring in a lot of extra money. The reality is that we’re going to bring in extra money whether we conform or not. The real issue is that if we conform, taxpayers won’t have to make about 20 adjustments to their returns and businesses won’t have to make around 30.”

Walker and Cushing pointed to a cautionary tale in the form of Minnesota, which did not conform to the U.S. Internal Revenue Code (IRC) and now has an 18-page tax schedule.

“They got caught up in politics. That example really sets the stage for what we’re trying to do in Virginia, because we have politics outside of conformity that are influencing what’s going on,” Walker said.

“This is not something that should be on the bargaining table. This is something they need to reach consensus on and move on. They can negotiate reform, but without conformity, it will be hard to collect tax revenue and fund the government.”

Virginia Secretary of Finance (and VSCPA member) Aubrey Layne, CPA, spoke to the group over lunch and expressed similar concerns over the potential fate of conformity, even including a similar cautionary tale about Minnesota’s tax code. He pointed out that deconforming the Virginia tax code from the IRC would have implications beyond just revenue concerns.

“Our tax department becomes something much different. Right now, we rely on the federal government to be our auditor. If you’ve lied to them, you’ve lied to the Commonwealth,” he said. “That may not be the case anymore. We will need a beefed-up response.”

The VSCPA spent the 2018 session working to help build unity across party lines with the understanding that the full scope of the changes from the TCJA would not be addressed until later. Originally, that was going to involve a special session this fall, but those plans fell by the wayside for a variety of reasons.

However, events since then have made Republicans and Democrats alike less likely to come to the table. House of Delegates redistricting, in particular, set those collaborative efforts back. With conformity now set to be dealt with in the usual way — emergency legislation introduced at the start of the session — educational efforts on behalf of the VSCPA are even more important, with a special goal of not allowing conformity to be wrapped up under tax reform or, worse, the budget process.

“Based on what I’m seeing, I don’t know how we get a tax conformity bill passed in January,” Cushing said. “February would be optimistic, but it may even be March or April. One comment that was made to both of us was after expressing we hope it won’t get wrapped up in the budget process, which means finality in April at the earliest. We got the response, ‘That’s if we have a budget.’

“It may be so toxic that we may not even consider any budget amendments until 2020.”

 

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