Jörg Werner
Professor of Accounting
Jörg R. Werner is Professor of Accounting at Frankfurt School of Finance & Management. His rese...
Accounting

How Big Data Will Likely Change the World of Accounting

May 11, 2015
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Change, in particular when being disruptive, causes threats for traditional business models. But at the same time, new opportunities arise. Let’s take a look how Big Data will impact the accounting landscape.

When thinking about preparers and going back some 20 years in history, financial reports have indeed been a relatively exclusive way to disclose information. The physical existence of these reports was crucial, and it was the main task of accountants to carefully prepare these reports. Nowadays, firms can use multiple channels to disclose and disseminate information, including their websites, social media, blogs and many more. Such disclosures have one advantage: They are timelier than annual or quarterly reports. There is another interesting fact: Accounting regulation largely ignores these new dissemination channels, even though recent research suggests capital market participants might find them pretty useful. The more companies strategically use these channels, the more it will affect what accountants are doing. Financial reporting primarily aims at providing useful information to the capital market. So it is just an incremental step to make the accountant an expert for all kind of disclosures that might be useful for capital markets, irrespective of the disclosure channel or the type of information. Accountants thus will increasingly need tools and techniques to identify material information within the firm, and to measure or anticipate any market reaction to disclosing them in different channels. We might even go a step further and argue that such accountants should not only be experts for the information a company “sends”, but for all relevant information which is produced about a specific firm. Think about identifying a need to disclose private information because “web listening” identified false rumors already adversely affecting market prices.

A key challenge for the effective use of Big Data is whether the data is available in structured, searchable form. Big Data likely does not simply mean filed accounts, but rather merging data from different sources. However, surprisingly little has been done in Europe so far in pushing firms towards electronic (XBRL) filing. Looking at Germany, large numbers of filings – deemed to be publicly available information – cannot even simply be downloaded and accessed. Interestingly, there is a publishing house which has the right to restrict the use of this data, making the access to information completely different from what we see in the U.S.

The availability of electronic filings will also be a precondition for enforcement agencies (and other interested parties, of course) to run algorithms on filed data. European enforcement agencies so far heavily under-invest in such technologies. But old-fashioned enforcers might sooner or later face new competitors detecting errors based on sophisticated algorithms and mass data analytics. Think about Silicon Valley firms once entering this business… Of course, they would need some accounting experts helping them to design intelligent detection tools.

So far talking about preparers, users and enforcement, auditors are also likely impacted by the Big Data revolution. A recent Handelsblatt article predicted the likelihood of accountants and auditors to be replaced by robots in 20 years to be around 94 per cent (only outperformed by tax advisors and telemarketers). If true, this sounds pretty disappointing, and there are first signals that large audit firms heavily aim at exploiting this opportunity to decrease labor costs. Of course the audit profession will not cease to exist, but it will experience significant changes in processes and required qualifications. Today, audits still require a large number of employees, with the employees sometimes doing quite repetitive (some might say: boring) tasks. Technological innovations increasingly will allow algorithms to perform such tasks. And the good thing is: Robots do not even need to pass a CPA exam. There is another case in point: Burdensome new regulation is currently hitting the industry and has yet set incentives to focus even more on advisory/consulting activities. Future staff likely has to switch more often perspectives between auditing and consulting. All of this suggests future audit staff probably needs another type of training. In short: Less cramming of rules and detailed knowledge, and more attention towards developing analytical and management skills, next to a sense for entrepreneurship. This also is likely to have a positive impact on salaries in the audit industry.

All of this is unlikely to happen in the nearest future, but to cope with the rapid change it is now the time to make decisions.

Prof. Dr. Jörg Werner is the Academic Director for Frankfurt School’s newest Master of Finance concentration, Financial Accounting & Advisory.

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