A fundamental driver for any business is the need to have accurate, timely and relevant information to make effective decisions. With the increasing level of data generated about anything and everything, ensuring that the accounting system is making optimal use of that data is a role shared by business owner and CFO alike. It is all too easy to rely on old procedures to produce financial reports that may have been effective when the business was bricks and mortar but fail to keep abreast of the specific demands of a business in the digital economy. One way of making sure that the reports are relevant is to look to history to consider some lessons. The fundamental pillars of accounting – delivering information to the end user and ensuring the integrity of that information so it can be relied upon – are as relevant in the age of technology as they were 7,000 years ago.
A short history of Accounting
As far back as 7500 BC, the Mesopotamians were using clay objects as counters to represent quantities of goods. The purpose was to show the output of crops and herds to determine crop shortages or surplus’ as the end of each season.
The Egyptians and Babylonians by the 4th century BC had also created audit systems for checking movement in and out of storehouses.
The Romans created even more detailed records of transactions, including cash and commodities that were being traded and the granting of land.
The Emperors wanted to know where and how their resources were being used. The correct matching of income and expenditure and the allocation and acquisition of resources remains one of the mainstays of the accounting tradition.
By 1494, the early stages of a monetary economy and use of bank loans led to Pacioli creating double entry accounting and the concept of the Balance Sheet.
In the 18th century, the industrial revolution and the resulting move to mass production caused new levels of inputs and outputs which required someone to keep track of all the parts. Accounting methods spread globally, becoming the cornerstone of keeping track of the vagaries of commercial activities, always changing to meet the growing user demands.
The history shows that, integral to any accounting system is the need to have information that aids decision making and that the integrity of the system needs to be paramount. With the advent of Industry 4.0, these same principles continue to be relevant, showing that accounting is as important as ever in helping businesses grow and thrive. The principles may be the same however the practical application will differ for the digital economy.
Information requirements of the end users
With the new ways of doing business that the digital economy provides, and the rise of accounting software as a service, there is a temptation to relegate accounting to the dustbin of time and accept what the various accounting softwares deliver. Now more than ever, the people in control of delivering financial information for the business need to make sure that the investment in accounting software and processes is meeting the needs of the business. If a generic solution is used, assumptions as to the treatment of costs or income may not be in line with the business model.
An example where different reports may be required to reflect the true situation is with the capitalisation of labour costs for building capital assets. Normally wages are an expense of a business and are found in the Profit and Loss Statement. The business could report them as such on the monthly management reports which would distort the profitability of the company as the costs were associated with a capital asset. For taxation purposes, the taxation legislation may require those wages to be capitalised while end of year financial statements may require a different analysis under the impairment regime.
Using this example, you can see that decisions about improving profitability based on the wages expensed may lead to changing product mix or reducing costs to the detriment of the future sustainability of the business. For technology companies, categorising expenditure comes with its own challenges. Expenses that may be capitalised, such as website costs, may be more in the nature of expenses due to the frequency of changes on the website to make it remain cutting edge.
While there are rules and regulations around preparing year-end financial statements and tax returns, there is nothing to stop a business creating more relevant internal reporting to meet its needs. To determine what these internal reports address ongoing discussions are needed between the CFO, the CEO and the Board, to ensure that the right information is being delivered to the right users.
Integrity of the Accounting information
Another element relevant today as it was in the past is data integrity. If data is not consistent or isn’t in line with the business model, the users could make subpar decisions or spend resources checking that it the data is correct. While the flexibility of accounting software is often regarded as a benefit, if the data being entered is not managed and interrogated it may be a detriment.
To ensure data integrity entry is consistent I have a few rules:
- Should be simple to input.
- Processes around data input should be created based on what needs to be achieved rather than how the technology works.
- Processes should be reviewed regularly to improve efficiency.
- Input as much data as possible that relates to a transaction, client, etc.
- Have a trouble shooting resource to help with each process and consistency across users.
While the digital revolution continues at breakneck speed, and it can feel as though we are being left behind by the pace of change, the fundamentals of accounting proven over the long history of commerce around the world remain just as relevant and fresh today as they did in ancient times.