Does Accounting Add Value?

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For many businesses-owners, accounting is perceived as a necessary evil. It is a cost that you have to bear but does not create value the way that other departments do, such as marketing, engineering, or finance. Some may argue about whether the accounting department of a firm is “productive” in the classical sense, but their support role is essential for any successful business. Accountants are derided for not providing as much value (especially by the finance and economics types, even though they are not productive in the classical sense, either) but without the accountants, large businesses could not operate.

Even for a small business, accounting is crucial. When your profit margin is in the thousands, you need to make sure and collect all receipts as soon as possible. Maintaining current books is crucial for this task. It becomes both more difficult and more important to discharge accounting duties as sales climb along with your need for new capital. As you move up the ranks and become a  larger company with many employees, accounting techniques, practices, and procedures enable managers to maintain control over cash flows and company resources. Anyone who has overseen cashiers knows the importance of keeping up with revenues.

Accounting information can also be used to make cost-benefit decisions, like the cost-benefit decision of how much accounting detail should be pursued. To make the cost-benefit decision, you have to use the tools of finance as well, and this is where the artificial distinction between finance and accounting dissipates. Without the building blocks of accounting, finance would have to start from scratch and end up with less reliable results. This is not because finance is not capable, but because there is value in comparative advantage. Financiers can focus their efforts on long-term capital budgeting, marketers can drum up sales, engineers can design, and accountants can precisely tally it all up.

Many companies also need accountants to report financial results to stakeholders, including stockholders, the Board of Directors, the government, and lenders. Although much of reporting for big business is typically seen as a legal requirement, the value of such standard reporting is still great and can be found in the cost of capital. Without assurance that a company’s financial reports are accurate, cost of capital would be higher to accommodate the additional risk. This concept applies to both small businesses that want to grow as well as large public corporations.

Further, our tax system in the US is quite complicated, and many companies do not have enough scale to warrant having in-house tax staff to navigate every complexity. In this way, tax accountants can help companies minimize tax expenses and associated risks. With their specialization and familiarity with tax law, tax accountants can consult with timthumbmanagement about strategies that can help them reduce their tax burden.

CFOs around the world agree that accountants add value not only to their company but to the public in general. We do this by performing critical functions that enable other business departments to do their work more efficiently. Next time you hear accountants being diminished as less important in some way, you can remind them of all these ways that accountants add value.

Braving the Black Carpet at the World Premiere for Divergent

In front of the Black Carpet!
In front of the Black Carpet!

A few weeks ago, my aunt invited me to attend the Divergent world premiere in Los Angeles with her. I immediately jumped on board, not realizing at the moment that it was the week after spring break. So, I took off a few days of school to jet off to LA for my chance to watch one of my personally most anticipated movies of the year and meet the celebrities that starred in it.

For those of you unfamiliar with Divergent, it’s a trilogy that takes place in a post-apocalyptic Chicago. It sounds a lot like hunger games, and it’s equally exciting, and even slightly better in my opinion. It was written by Veronica Roth when she was only 21, and was inspired by a lesson in one of her psychology classes about exposure therapy.

Being on the black carpet was absolutely incredible. The majority of the cast was made up of fellow 20-somethings, but there was also experienced big-names such as Kate Winslet, Ashley Judd, Tony Goldwyn (you may know his as President Fitzgerald Grant from Scandal). A lot of the cast from Scandal came out as well, to support Goldwyn.

#selfiewithEllieGoulding
#selfiewithEllieGoulding

Not only was it full of actors, the black carpet also had singers and Olympic athletes. I got to meet Ellie Goulding as well as my figure skating idols Gracie Gold, Ashley Wagner, and Jason Brown.

Some of you may be confused by the fact accountants and Hollywood can be combined. However, the connection is a long-standing one. PwC is the official counter of Oscar votes and secures the validity of the winners, and EY does the same for the Golden Globes. It seems unlikely, but everyone needs an accountant!

Also, in the future the Texas MPA program will be offering it’s students an opportunity to intern for an entertainment company and take classes in production accounting through UTLA. If that’s a dream of yours (as it is for me, but unfortunately my time is limited on the 40 acres), you should definitely stay tuned for what lies ahead for Texas MPAs!

What is a CFP?

Too often we find ourselves in a certain track, not realizing there are other paths out there also worth exploring. Accounting students are prone to this mentality with so many thinking that a CPA is the only certification worth pursuing. While this may undeniably be the Holy Grail for accounting, there are other worthwhile careers like a Certified Financial Planner or CFP that is also worth looking into. My fellow MPA student Brooks Butler has written some on this topic but I’d like to delve deeper into this particular certification, especially since we just had a speaker talk about that in our most recent MPAC General Assembly Meeting.

Mr. Pilgrim and I

CFP is a certification for those who are looking to help clients, mostly individuals and families secure their financial future. Mr. Alan Pilgrim, coordinator for the UT Professional Development Center, visited with MPAC this week and likened the profession to that of a doctor-patient relationship. A CFP is someone who helps clients in planning their finances for life events, such as having kids, paying for school, saving for retirement, etc. With the recent financial crisis in 2008 and the marketing push initiated by the CFP Board, this role has never been more important. Mr. Pilgrim asserted that this profession would be in the top five in demand careers in the next decade, especially when you consider the retiring baby boomers needing help with their finances.

There are a few caveats to a CFP, however. First, as eager as MPA students may be to jump in this opportunity, the profession and the clientele mostly reward seasoned folks. Those with significant work experience will succeed and our young age right now, according to Mr. Pilgrim, is not going to be an advantage. This is understandable because I wouldn’t trust a 21-year old with my retirement nest egg, assuming that I have one. Nonetheless, I think it is important to be aware of this, because the demand for CFP is only going to get higher and this would be an excellent opportunity 10 or 15 years down the road.

Second, with more women handling the family’s finances, Mr. Pilgrim also observed that women CFPs have become even more in demand. Given the highly personal nature of the profession, it is not far-fetched to expect clients to be able to relate to their advisors, especially the ones helping with their finances. There’s a lot of client interaction in this profession, so solid relationship building skills are absolutely imperative.

All in all, I think a CFP is a rewarding career because at the end of the day it is about helping people. It is about creating a financial security for clients and lending one’s expertise so that they may live the life they envision for themselves. The good news for us accountants is that this is a path we can take and it’s not about collecting an alphabet soup of letters just because. One has to really examine whether a certification is suitable for one’s goals and ambitions. Because in the final analysis whether it is a CPA or a CFP or something else, it is about the value we derive from it.

The right to question the Constitution?

constitutionIn the most recent publication of the Texas Exes’ Alcade, I found there to be a particularly interesting article written by Sanford Levinson called “Reframing the Constitution”. The article is extremely well written and I encourage everyone to read it for themselves, but the main point of the article is that the people of the United States should consider re-vamping the Constitution in a new constitutional convention. His argument is that “there are some truly serious deficiencies with the Constitution that are highly detrimental to our ability to meet the challenges that we face as a nation”.

Levinson also raises some very interesting points in relation to what the framers of the constitution believed. When the Constitution was drafted in 1787-88, the world was a very different place and the issues facing our country were less complex.  The founders couldn’t have predicted the exponential increases in complexity and non-linearity of events that would emerge as a result of globalization and technological innovations.

A good way to look at how complex the world has gotten from the 18th century is by looking at an excerpt describing the brief history of the global economy from Eric Beinhocker’s book The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics:

To summarize 2.5 million years of economic history in brief: for a very, very, very long time not much happened; then all of a sudden, all hell broke loose. It took 99.4 percent of economic history to reach the wealth levels of the Yanomamo, 0.59 percent to double that level by 1750, and then 0.01 percent for global wealth to leap to the levels of the modern world. Another way to think of it is that over 97 percent of humanity’s wealth was created in just the last 0.01 percent of our history. As the economic historian David Landes describes it, “the Englishman of 1750 were closer in material things to Caesar’s legionnaires than to his own great-grand-children.”

Why are we requiring ourselves to be governed by a document written and based in principles and mental models of how the world works from a period in time that has more in common with Caesar than with the complex world we are living in?

Levinson’s smoking gun (in my very humble opinion) in the article is a quote from a letter Thomas Jefferson wrote in 1816 to his friend Samuel Kercheval:

“Some men look at Constitutions with reverence and deem them too scared to be touched. I am certainly not an advocate for frequent and untried changes… but I know also that laws and institutions must go hand in hand with the progress of the human mind.”

Is a Burrito a Sandwich? And other dilemmas…

blog_04_08_10These are the types of questions that come up in the varied curriculum that makes up business school. As accounting students, it is easy to forget that not every subject can be analyzed in the same manner as a financial statement. For instance, the burrito question came up in a business law class that I share with a couple dozen other Traditional MPA students. The problem was that Panera Bread had a contract with a shopping mall that precluded the mall from leasing to other sandwich vendors. The mall subsequently leased to a burrito vendor, so Panera sued on the grounds that a burrito is a sandwich while the mall argued that a burrito is different from a sandwich. Panera lost, presumable because of the obvious differences between burritos and sandwiches. Still, a case like this makes one ponder the gray areas of reality that we have to suss out on a daily basis.

Even though accounting is known for being a black-and-white, straight-forward discipline where there is always a correct answer, accounting students must still understand that the world does not always operate that way. Although there are seemingly hard and fast rules for financial accounting, such as whether a lease is capital or operating, there is still a gray area even there – sometimes a lease can be operating to one party and capital to the other. Despite SOX prohibiting auditors from providing certain consulting services to clients, firms still push the boundaries of what is acceptable and what is not, quite often straddling a line.

Sometimes ethics plays a role in these types of issues, but sometimes there is no right or wrong or good or bad. There is merely a resolution for the same reason a coin has to land on one side, whether it be heads or tails. In arriving at a conclusion, a creative student can rationalize one side or the other and attempt to convince the reader that their rationale is best (or at least most creative). In some cases, like in tax, an accountant can advocate for the client, but an auditor is not really supposed to advocate for the client, but instead for shareholders or the public in general who may be prospective shareholders. Further, management accountants do not necessarily advocate for anyone, but seek the strategy with the highest tangible benefit.

Is Starbucks a manufacturing company? They aren’t if you think about the typical manufacturing company. But, in order to secure a valuable tax deduction their coffee roasting activities are considered manufacturing because they convert raw coffee beans into brew-able beans. Is this wrong, or are they merely seeking to apply a legitimate law to their legitimate process?

Back to the original burrito/sandwich dilemma. In class, it was not sufficient to merely say, “It is not a sandwich because it is a burrito.” We had to explain why. For instance, one student asserted that bread is different from a tortilla. Another suggested that sandwiches are stacked while burritos are wrapped. The point is that it could be argued either way, and it was, but only one resolution emerged. In accounting, there is only one correct answer, but in reality there can be a plurality of answers and being able to distinguish them creatively is a skill that is difficult, but important, to learn.