Responding to challenges from technology

The challenge of utility and the challenge of technology will create an environment which will have a significant impact on the nature of professional practice. This is the second and concluding part of the excerpts from the Brahmayya Memorial Lecture delivered by Mr. Yedi H. Malegam, former President, Institute of Chartered Accountants of India, recently in Chennai. The first part was published in these columns on July 19.

The migration of business from the document orientation of today's paper environment to the electronic environment of the future will significantly affect the manner in which audit firms are organised. They will have to make significant investments in technology-hardware, software and training.

Estimates in the U.S. show that the cost of the IT will soon overtake office space as the second biggest cost after staff costs and on average firms will be spending at least 7 per cent of their turnover on IT. In the U.K., almost 30 per cent of accounting practices do significant amount of business on-line. For the big firms in many countries, hot desking and hotelling, where nobody has a personal desk, has become quite popular. The virtual firm, with no fixed premises, is fast becoming a practical proposition.

Outsourcing risk

The increased use of information technology by companies will have an even greater impact on accountants working in those companies. Doing business electronically means that many of the transactions processing tasks which make up as much as 60 per cent of an accountant's work will be eliminated by technology. There is a serious risk that financial tasks will be outsourced or deskilled through the use of sophisticated software and systems. The finance function will therefore be required to drive performance, not merely measure it and if it does not add value it will become a cost that will need to be minimised or even eliminated. In 1999, KPMG predicted the demise of the accountant in 10 years. Recently they admitted they were wrong. It could be earlier.

If however the profession adequately addresses the challenges posed by technology and effectively responds to the same, the present scenario can provide a number of opportunities. First, the development of e-business will mean greater involvement of counter-parties such as customers, suppliers, and other business partners who will need assurance which the profession can provide. Second, integration of operating and financial processes will result in a seamless flow of timely information. Managements will be concerned about systems development, access controls and the quality of information that is captured for processing. This could provide a huge area of opportunity for the profession. Third, automation will free the auditor from much of the present routine and enable him to concentrate on things that matter. Finally, public demand for transparency will encourage companies to provide information on a wider basis, creating the need for independent verification of such information.

The challenge of utility and the challenge of technology will create an environment which will have a significant impact on the nature of professional practice. First, basic accounting may be replaced by the application service provider (ASP) concept whereby accounting services are conducted by ASPs out in cyberspace. Already in the U.S., Internet companies are doing tax returns free in exchange for the company information they access and in time such companies may take over a large part of the tax activity. Second, as company systems become more robust, clients will see less value in an audit opinion which merely gives assurance and will expect auditors to make use of the knowledge they gain through audit to provide feedback that will help improve their businesses. Third, particularly for the smaller firms, a significant part of existing audit practice could disappear as accounting systems get centralised and accounting locations diminish. Inevitably, therefore, audit firms will seek to supplement their audit practice with other areas of practice, broadly grouped under the title of management advisory services.

Threat to audit independence

As this development gathers force two major problems will arise. First, there is the threat to independence. It is claimed that audit and consultancy are contradictory in that one demands objectivity and independence and the other a direct interest in the client's success. Regulators are concerned about this and stringent regulations have been framed in most countries to ensure that audit independence is not impaired when non-audit services are rendered. But despite these regulations, the share of management advisory services is growing. It is believed that for the biggest firms abroad, fees from management advisory services account for more than half the firm's total revenue whereas audit fees account for barely 30 per cent. This is a trend which will develop in our country also.

Second, there is the growing recognition that management advisory services need a combination of skills which audit firms just do not possess. This creates the need for mixed partnerships, for example, with law firms or with other disciplines. While the issue has been debated for long, no solution has yet been found. While multi-disciplinary firms have not been established, all major firms abroad have added other areas of business to their own and virtual law firms have been created within accountancy groups. Similarly, large actuarial and insurance consulting practices have been created. In essence, therefore, the potency of the brand names of established accountancy practices has been used to exploit areas outside the traditional profession of accountancy.

These developments have been possible because the market place has accepted that accountancy firms can provide credible service in areas other than traditional accountancy services. But this does raise the challenge of identity. These services though provided in the firm name are more often provided by persons who are not accountants but members of other disciplines and the only link with the profession is often the firm name. There must surely come a time when using such a name and describing the firm as an accounting firm will be positively misleading. As this trend develops, the profession will increasingly need to address issues of regulation and disciplinary jurisdiction over the firms and the persons who provide these services under the umbrella of the firm's name. In the alternative, it may become necessary to accept the pressure of market forces and create a well-regulated framework for the creation of mixed partnerships, separate from accounting firms.

There is another aspect of this matter which needs to be considered. The large accounting firms are increasingly describing themselves, not as accountants, but as 'business advisers' or variants of that term. Perhaps they are doing so because a large part of their people are not accountants but members of other disciplines. Perhaps they want to convey the message that they are competent to render a variety of services, other than accounting, which others traditionally render. The danger of course is that other disciplines which consequently feel threatened will retaliate by offering to do work which is the traditional preserve of accountants. First steps in this direction are already seen in the areas of taxation, management audit and internal audit. Those that will get most hurt are unfortunately the small practitioners, a substantial portion of whose fees come from traditional services, which brings us to the challenge of image.

There is a danger that the trust that the public once placed upon the profession may be gradually eroded. This could have several consequences, First, there could be a demand for more regulation which could in turn result in a loss of freedom, discretion and autonomy. Second, whereas in the past clients have accepted that as a profession operates in the sphere of judgment, its members would act in good faith but could not guarantee an outcome. The clients would now be intolerant of failure and increasingly prone to take legal action to recover damages.

Image at stake

What is equally important is that the profession should not allow its value system to deteriorate. What is vital for the profession is the respect which it commands not merely its size or its profitability. These should be the results of its vision, not the vision itself. No doubt the institute has a code of conduct which it enforces. But a code will operate in practice only when the institutes' membership shares the ethical principles that underlie the code. In the past, this attitude to principles was, at least to some extent, shared as many felt pride in belonging to the profession and felt that by upholding its principles, they were doing something good. Unfortunately, a degree of cynicism is gradually creeping in and membership of the profession is seen only as a means to achieving wealth and consequent success. This is a dangerous trend which needs to be arrested.

If the profession wants to improve its image, it must also be willing to take pro-active steps like the profession in other countries to make contribution to the solution of issues which are of national concern.

Among the most important of these is the issue of corruption. Transparency International releases periodically its rankings of corrupt countries. We cannot be proud of our ranking.

At the World Congress in Paris in 1997, the World Bank President, Mr. James Wolfensen, urged the delegates to be in the forefront of the fight against corruption and IFAC has put the item on its agenda. Similarly, fraud is a significant burden and a hidden tax on the consumer.

The English Institute has sponsored the Fraud Advisory Panel, an independent body of experts from across the public and private sectors, who have identified a number of initiatives that, with appropriate support could do much to tackle fraud head on. We could also make a beginning-perhaps in public sector banks with which the profession is so much involved.

(Concluded)

Send this article to Friends by E-Mail

Section  : Business
Previous : Citicorp Maruti Finance gets P1 plus
Next     : Industrial Relations: Towards social partnership?