The world is changing and with that businesses have to keep up with the progression in regulation and reporting requirements such as IAS, IFRS and GAAP. With this in mind we thought it would be useful to gain some insights into why Technical Accounting is so crucial to businesses today and the challenges it faces.
For the first insight in this series I caught up with Kalpesh Shingala, Senior Director of Global Accounting Advisory and Policy at Cognizant, to find out their thoughts on why this area is so important.
Why is Technical Accounting so important in the world of modern accounting?
The way companies do business has changed significantly over the last three decades. An exponential rise in the use of internet, innovative technologies, e-commerce, complex financial risk management and modern business strategies have changed the way commercial transactions are structured. Global organisations operate under various different regulations and have disparate financial reporting requirements. Although US GAAP and IFRS have been the two most comprehensive accounting frameworks in the world today, they are not fully converged and, as a result, differences in these accounting principles still exist. Accounting standard setters of many countries use IFRS as their initial reference point but they are required to make changes to the original standards as issued by the International Accounting Standards Board (IASB) to render them suitable for use within their local business environment. This introduces challenges that were not foreseen when we were living in a world with a handful of accounting standards.
The U.S. Financial Accounting Standards Board (FASB) and the IASB have issued several new, and modified existing, accounting standards in the last two decades to keep up with the pace of a rapidly changing business landscape. Some of these standards are quite lengthy and complex. Also, several business transactions require application of more accounting standards than one. Accounting firms spend hundreds of hours in writing interpretive guidance on specific accounting topics for their clients and, understandably, many of their publications run into several hundred pages.
This complexity and the regulators’ focus on consistent application of accounting standards necessitated accounting firms setting up specialist teams with subject matter experts (SMEs).
Likewise, companies were required to expand their financial reporting teams by hiring new or dedicating existing resources who could focus on acquiring in depth knowledge of these accounting standards and who could run the new standards’ adoption projects across the organisation in an efficient manner. Global organisations having to prepare and file financial statements of their subsidiaries or legal entities operating in different countries for local/regional compliance face an added challenge of having to establish teams who have knowledge of local accounting requirements too. These specialist teams and SMEs came to be known as an Accounting Policy Team or Technical Accounting Group or Accounting Advisory and Policy Group etc. and assumed a critical role in ensuring timely adoption, policy documentation, consistent interpretation and application, and an overall compliance with the organisation’s diverse financial reporting requirements.
What are the advantages of having experts in this space in an organisation?
Over time, technical accounting teams have gained significant importance within the finance function of organisations as commercial teams often need to engage with these experts to ensure that their planned transactions do not trigger any unexpected or undesired accounting and reporting implications. In fact, business teams even partner with these SMEs early on in the structuring of their transactions such that they achieve a desirable financial reporting outcome. These opportunities involve cross-functional engagement with other global functions such as Tax, FP&A, M&A, Corporate Development and other senior stakeholders, and provide a platform to technical accounting teams in playing an influential role in the decision-making process.
They develop great insights into business activities of the company and thus build deep relationships within the organisation fairly quickly.
This, in turn, creates several opportunities for these SMEs to take up senior roles within the finance organisation ranks. Given their subject matter expertise and a higher organisational profile, technical accounting champions command huge respect and are rewarded well within the finance organisation. And for these reasons, this team usually sits directly under the Chief Accounting Officer or Chief Financial Officer.
The unique skill set possessed by these team members arm them with an ability to easily eliminate competition in their niche market.
That said, a relatively higher compensation aspect has constrained many companies to upskilling their existing resources to take up additional technical accounting responsibilities rather than setting up an independent full-fledged technical accounting function. However, this has helped several SMEs take up consulting roles that offer steep per day rates and flexibility usually not available in permanent roles.
What are the risks of not having expertise in this space?
Misinterpretation and non-compliance are the biggest risks companies face if they under-invest in a robust technical accounting function. As noted above, the length, complexity and number of accounting standards in the recent years have increased manifold. Adoption of many of these new standards requires companies to launch a multi-year adoption strategy and make significant changes to their existing systems and processes. Adoption of a new accounting standard also involves several hours of training, consultation and new policy documentation. Many companies fail to recognise this challenge and expose themselves to delays, inaccurate application or non-compliance.
In several countries, the CFO and CEO have to certify completeness and accuracy of the financial statements filed with the regulator and in many countries directors even face personal liability for non-compliance or wrong decisions (e.g. declaring dividend in excess of distributable reserves in the U.K.). In the U.S., the Securities and Exchange Commission’s (SEC) reviews result in many public companies having to restate and reissue their historical financial statements due to an incorrect application of the accounting standards. Hence, the contribution of a robust technical accounting function cannot be over-emphasised.
Organisations with global presence face further challenges.
Having to comply with different GAAP frameworks in multiple jurisdictions require careful planning and strategy such as alignment of accounting policies to minimize differences between the framework used for local reporting vs the GAAP used in the entity’s consolidated financial statements. Differences in local and consolidation GAAP also introduce several operational challenges such as different chart of accounts, financial reporting systems and tailored audit documentation. Most transactions also need to consider impact of local tax and company law requirements. Treasury transactions such as dividend distribution, foreign currency risk management and hedging often cause financial reporting volatility in local statutory financial statements as most of these strategies are planned to mitigate these risks at the global level in their consolidated financial statements.
Lack of an experienced technical accounting team who can help decision-makers navigate through these multiple layers of responsibilities may result in companies missing out on such structuring opportunities.
What are future challenges/themes that will arise in this space?
Strong technical accounting skills take years to develop and require a good balance of passion, dedication and opportunities/exposure. Having a solid foundation and conceptual understanding of various accounting topics is an essential ingredient in developing subject matter expertise across several topics. Companies usually cannot afford to dedicate resources focusing only on a single topic and, as such, one has to develop a good grasp of several topics. Knowledge of available technical reference guides – both paid an unpaid – and innovative research capabilities go a long way in developing skills in this area.
Continuing professional development plays a key role in keeping abreast of the changes in the accounting world.
Although there are several free online resources available to assist with this, more interactive paid programs are, sometimes, more relevant in developing best practices in an organisation. Technical accounting specialists are also known to lack a key soft skill: ability to simplify complex accounting concepts while presenting them to senior stakeholders. Many organisations fail to support teams in developing these skills due to the cost considerations.
A typical pitfall for technical accounting experts is over-confidence on their own analyses and conclusions. This leads to their lack of willingness or inability to identify situations when a wider consultation may be warranted. Many areas of accounting are extremely complex, require hours of research and could often lead to different interpretations. “Sleeping over” own findings and discussing with other members of the team or external advisors assist in arriving at conclusions that are more supportable from an audit perspective.
Well-documented processes, techniques, checks and audit documentation are key to creating a healthy internal control environment.
A mature technical accounting function uses tools, checklists and process documents to assist in an efficient and effective consultation. With the advent of Artificial Intelligence, innovative and sophisticated tools are being developed to assist with data-intensive analyses. While these technology-assistive tools can deal with data more effectively, they are a long way away in replacing human judgements required in interpreting and applying increasingly complex accounting standards.
*The views that Kalpesh has expressed are personal and should not be deemed to be those of Cognizant.