Accounting…and Chemistry? A Match Made in Heaven

The diversity of the tMPA program is impressive. Radio, Television, and Film, Mathematics, Russian Language and Literature majors are sprinkled amidst the Accounting, Finance, and Economics degrees. However, my Chemistry degree was an immediate object of curiosity. Four months ago, the question of why I made the switch from science to accounting was difficult to answer.

Today I’m relieved to say that I’ve almost figured it out, and for those who haven’t heard my reasoning, I’ll explain now. Here’s how chemistry and accounting are more alike that you might think:

1) Chemistry is all about research. Data collection and analysis, not to mention designing experiments, drives the daily life of any scientist. Modern accounting is strikingly similar. The intuition that I developed over the four and a half years I spent as a chemistry major transfers very neatly to accounting, especially auditing.

2) Scientists understand that numbers aren’t just numbers; every digit you see printed on a page relates back to something actually happening in the physical world. So when I look at an account on the balance sheet or income statement, I can see what transactions and business processes went into making that number. This helps take the abstraction out of accounting and make it more relatable.

This is all very well and good, but it only answers the question of how chemistry related skills relate to accounting. But why did I choose accounting? Chemistry was lacking a couple of things that I discovered were very important to me in a job.

1) Chemistry is not an inherently social profession. But accounting is. Especially as an auditor, you have to build strong relationships in order to do your job well. This includes the team you work with, your clients, your pool of potential clients, non-accounting experts, and regulators. The challenges and opportunities that this presents fascinate and energize me.

2) The questions you tackle in research can take longer than several researchers’s lifetimes to answer. For me, this was stifling. In contrast, accounting is extremely dynamic and operates on a much shorter cycle. You will see a wide variety of industries, sizes of clients, and business models and will have to find personalized solutions for each one. This is another incredibly exciting piece for me.

It makes a lot more sense than you might think at first. Next time I’ll talk about what it was like to go through recruiting with a non-business background and my observations on success.

Tis the Season…For Finals

Finals, finals, finals. When you’re in the business school, discussions about finals are more popular than debating the short term effects of Obama’s re-election towards corporate life.  I wanted to take the time to tell everyone that now, during finals, is the most important time to take a breather. Don’t let nerves get the best of you! Keeping a cool head, getting some solid sleep and eating right are the most important things you can do to prepare successfully for finals. From someone who has done his fair share of stressing out, I can tell you that pulling your hair doesn’t help. Here are some of the things that I like to do during finals:

  • Find an hour or two to have lunch with a friend. Everyone needs to eat and talking to friends is an excellent way to de-stress.
  • Numerous studies have proven that by exercising not only do you improve your physical well-being, but it can also positively affect your cognitive and critical thinking skills. I try to get a little bit of cardio to stay in peak condition both physically and mentally.
  • Keep up with your studying schedule. You’ve had a whole semester to slack and fall behind in class, but if you need to get through a chapter a day to be ready for a test, do a chapter a day! Remember that working hard and doing well in class equates to a happy winter break where you can relax as much as you’d like.

Have faith and believe in yourself! You didn’t get admitted into the number one accounting program in the nation for nothing! You all know what this time is like. Keep your head up, smile, and take a deep breath. Now share with us what you do to stay sane during finals.

Macroprudential Regulation: Moving Beyond Dodd-Frank & Basel III

Last semester I had the pleasure of taking Law for Finance with the renowned Professor Prentice. It was incredibly helpful to learn how our work as accountants flows through a regulatory framework that seeks to create a level playing field for companies issuing securities and their investors. As auditors we’re most familiar with Sarbanes-Oxley and GAAP/GAAS, but these are only a few pieces of the puzzle that contribute to the rational accumulation and allocation of capital so critical to economic growth.

It’s also important to look at what policymakers call “macroprudential regulation”. These are regulations which seek to mitigate the damage done by the emotional swings among financial intermediaries from exuberant optimism to irascible pessimism, also known as systemic risk or the boom-bust cycle. The Dodd-Frank Act was an important new addition to the macroprudential regulatory framework by requiring the trading of derivatives to be on exchanges and prohibiting banks from gambling with depositors’ money in financial markets. Accountants are instrumental in implementing these regulations and monitoring for continued compliance. Likewise, through the calculation of the Allowance for Loan and Lease Losses (ALLL), accountants must be familiar with the credit risk models mandated by Basel II, an international accord between central banks designed to minimize systemic risk.

During my Big 4 internship I examined credit risk models for a large retail bank to verify that their ALLL was properly calculated. This ALLL feeds into the next pillar of Basel II, capital adequacy standards that help the banking system through downturns and protect deposit insurers like the FDIC.  In light of the 2008 financial crisis, regulators made the capital adequacy guidelines more stringent with the introduction of Basel III. However, few are optimistic that this will prevent future economic bubbles.

Academics have argued that this patchwork of regulations around depository institutions is a case of the doctors treating symptoms instead of the underlying disease. In accounting terms, the disease is that depositors do not have an investing cash outflow when they deposit their money, whereas depository institutions have a financing cash inflow. No other transaction in the economy has this accounting asymmetry, which is commonly known as fractional reserve banking. Professor Jesús Huerta de Soto, from Rey Juan Carlos University in Spain, wrote a book in 2005 (PDF) detailing how this shaky accounting creates systemic risk in the banking system. Most recently, Michael Kumhof, a professor at Stanford University and one of the top economists at the IMF, published a paper (PDF) detailing how a financial system could simultaneously transition from fractional reserve banking to 100% reserves, reduce excessive leverage, and prevent the boom-bust cycle.

I had the honor of meeting Professor Kumhof at the Association for the Study of Peak Oil & Gas’ annual conference which was co-hosted by the University of Texas. He was optimistic that policymakers will come around to what is called the “Chicago Plan”, originally devised by a group of economists at the University of Chicago.

In a nut shell, the plan would have depository institutions finance their investing activities from private investors and loans from the government rather than lending out deposits. Deposits would be much like segregated accounts in a trading house or bailments; the bank is a custodian of the funds but is not allowed to lend them out. This would prevent excessive credit creation since banks would have to borrow real savings, much like a mutual fund or a securitization deal that issues bonds.

Perhaps the most fascinating aspect of the plan is that depository institutions in the United States would have to borrow 180% of GDP from the government to meet the 100% reserve requirement. This would mean that the Federal Government would have a negative level of net debt. Similarly, this would immediately solve the European sovereign debt crisis.

To prevent deflation, the government would have to create and spend new money at a rate of 2 or 3% per year, which would help reduce the budget deficit. This nominal money growth would be one aspect of macroprudential policy under the Chicago Plan. The amount and riskiness of credit creation would still be controlled by capital adequacy rules like Basel III and interest rates would be set by how much the government (or an independent central bank) charges financial institutions for additional liquidity needed to finance large productive investments.

Professor Kumhof estimates that changing the regulation of deposits would result in a 10% boost to GDP growth. This is why he is most optimistic that the Chicago Plan will, over the coming years, become a cornerstone of financial reform. Here is his presentation of the paper he published in August:

Accountants will play an important role in advising depository institutions with restructuring their balance sheet and revising their internal controls to reflect the new accounting treatment of deposits. That said, the greatest benefit for us will be that the manic instability of financial markets will be give way to steady real economic growth.

What benefits or drawbacks do you see from the Chicago Plan?

Surviving and Thriving as a tMPA

surviving and thriving in TMPAThe decision to come back for a master’s (or a PhD) isn’t an easy one. If you’re anything like me, the prospect of at least another year of lectures, homework, and all-nighters seems daunting, especially if you’ve been away from school for long. Now that I’ve gotten a full semester under my belt, I thought I would share how my tMPA classmates and I have made the transition easier.

1. Relearn – or learn – decent study habits.

Now is the time to really figure out what works for you, rather than just showing up to class. Get analytical about it, and don’t be afraid to try something new. Sometimes the key to understanding difficult material is as simple as doing the reading after class instead of before, or hand writing notes rather than typing them.

2. Don’t forget downtime.

The type of schedule that school demands is grueling compared to a 9-5 job. Not only is it irregular, but you take a lot of your work home. If you don’t make some sort of relaxation a priority, it’s easy to wear yourself out within the first month. I make a point of getting a massage once a month and keeping up with my recreational reading to get my mind off of class work.

3. Respect the difficulty of graduate coursework.

It bears repeating, over and over, that graduate level coursework is totally different than the vast majority of undergraduate coursework, and is taught differently. Your finely honed memorization and recitation skills aren’t going to be nearly as helpful as they used to be, since topics quickly become very conceptual.

4. Don’t obsess about your grades.

Everyone is here for slightly different reasons and has different goals. Some people are going to need a perfect 4.0 for their dream career, but others won’t, so don’t waste energy comparing yourself needlessly.

5. Bring all of your life experiences to the table.

You have a unique advantage as a graduate student – you’ve already been an undergraduate student. Make sure you take full advantage of the variety of unique opportunities to shine that this gives you. Expertise that you developed during your bachelor’s degree, during your jobs, or just in general can be applied if you are diligent about looking for opportunities to do so.

Getting Involved: How Much Is Too Much?

One of the biggest struggles I’ve faced during my time at the University of Texas is figuring out how to get more involved on campus. There are tons of opportunities to get involved in student organizations, volunteer work, internships, and even academic research, but my problem has always been finding a balance between doing well in my classes, getting involved in extracurricular activities, and having enough free time to relax once in a while.

My inherent inability to find that balance is pretty obvious when you consider that I added an entire extra major just because I like to read and write and wanted to take some non-business classes. Doing Plan II was a lot of extra effort for something that I didn’t initially think would have a huge impact on my career, but it ended up helping me a lot with the research and writing aspects of tax.

Beyond academics, I’ve had to learn to say no to a lot of great opportunities, such as being a TA, helping on research projects, and getting involved in too many of the student organizations on campus. One thing that has helped me decide whether I should get involved in a new activity is figuring out how much time it would take, and then going through a typical week (or thinking through it, if I don’t have time) and seeing if I can spare that much time, but obviously that’s not foolproof. Another great way to reach that balance when I’m short on time and energy is to participate in one-day events like Project Reachout or Project 2012, where you can spend a day volunteering without a semester-long time commitment.

So far, I’ve come pretty close to finding a good balance, but I’m always looking for new time management tips!

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