Accounting for the future

By Alvin Lee

SMU Office of Research – In 2013, researchers at Oxford University predicted that accountants stood a 95 percent chance of having their jobs replaced by AI. Their paper ended with a list of jobs and their probability of being “computerisable” – recreational therapists were the least likely to lose their jobs to a machine (0.0028 probability, or 0.28 percent) while telemarketers were the most vulnerable (0.99 or 99 percent).

While accountants were not dead-certain of being shoved aside by AI, the research made headlines and raised concerns in accountancy circles.

“When automation or AI first became mainstream, people say a lot of work in accounting is repetitive and therefore accountants will be replaced,” recalls Cheng Qiang, Dean of the SMU School of Accountancy (SOA), and the Lee Kong Chian Chair Professor of Accountancy. “After all these years, we have not seen accounting jobs being replaced by AI, but instead we are seeing the opposite. Accounting firms are desperately looking for people.

“This is not only happening in Singapore. I talk to the partners at major accounting firms, and they have all shared they cannot hire enough people.”

Building the best accounting school

What AI has done, Professor Cheng observes, is automating much of the mundane and repetitive work in accountancy, freeing up accountants with up-to-date technical skills to focus on activities that create value for clients. He adds: “But it will be challenging for people who were educated, say, 10 or 15 years ago. If they don't catch up, part of their job will be replaced. So, we have to think about the impact of technology from these two sides.”

Viewed in that light, Professor Cheng’s vision for SOA when he was appointed as the dean in 2015 was perhaps prescient. Other than his plans for the postgraduate program and institutional engagement, the Dean focused on “improving the value proposition of SOA’s undergraduate program”. A big part of that was the offer of Accounting Data and Analytics and Financial Forensics as second majors.

“Financial forensics was designed to be a unique, niche program targeting a small group of students, but Accounting Data and Analytics has become the second most popular second major in SMU, right after finance, which surprised some initial sceptics,” Professor Cheng tells the Office of Research. He elaborates: “There were two concerns about a second major related to data analytics, specifically focusing on accounting and finance applications. One, whether you can train an accounting and finance professional to do what the computer science graduates are doing. The other point was: Were employers looking for graduates who are trained in accounting and finance, and also in analytics? If they are, why don't they just hire computer science graduates?”

“We spoke to all the major employers about what kind of people they want, and they want people who have domain knowledge of accounting and finance. They also want people who can handle the data. But people in these fields are often in separate departments and sometimes they don't talk to each other. You need a bridge. So, we want to build a bridge between them [by training analytics-trained accountants].”

Professor Cheng’s postgraduate initiatives, which led to the creation of the Masters degree in Data & Analytics and CFO Leadership as well as a PhD in Accounting, have raised the profile of SOA. But it is perhaps SOA’s achievements in research that rank as the biggest achievements. The school’s No. 1 ranking in Archival Research and Citation Rankings in the Brigham Young University (BYU) Accounting Research Rankings is a testimony of SMU’s burgeoning reputation in the field, which has grown following collaborations with top Chinese institutions such as Tsinghua University and Zhejiang University.

The Dean says, “I am very proud of what we have achieved in the last eight years: The launch of second majors; the launch of two new master programs; the launch of two doctoral programs; and the increasingly high research rankings. Going forward, the most important task is to strengthen the two research clusters: digital transformation in accounting and finance, and ESG issues related to accounting. We hope to establish a reputation in these two lines of emerging research.”

Pollution prevention technology: Saves the earth, improves finances

When Professor Cheng passes on the leadership baton to the next SOA dean in two years’ time, he will concentrate on his own research, a key focus of which is on sustainability. In one of his current working papers, “Doing Good by Being Smart: Green Innovation, Firm Performance, and ESG Funds’ Capital Allocation”, Professor Cheng and his collaborators examine how firms’ green innovation strategies affects its financial performance and ESG funds’ capital allocation.

Specifically, companies that file patents of pollution prevention technology receive a boost in financial performance in the years after the patent’s approval. The financial performance gains for these companies are bigger than those that file patents on pollution control. Those in the former also experience an increase in ESG fund ownership vis-à-vis the latter.

Using the analogy of a car, Professor Cheng explains the difference between “pollution prevention” and “pollution control”.

“[Companies adopting pollution control technologies] would add a device to the exhaust pipe to filter the air to capture the carbon monoxide instead of it being released into the air. That same principle applies to manufacturing plants emitting smoke.

“Pollution prevention is essentially about ‘Why does this pollution come out of the process in the first place?’ Maybe the engine is not designed efficiently. If the engine is designed differently, there might not be so much smoke in the first place. So, they change the process, and sometimes they change the product.”

By looking at over 36,000 firm-years from over 3,000 unique firms between 2000 and 2018, Professor Cheng applied OECD classifications of green patents and then classified them as pollution prevention or pollution control patents based on the description of the patents. The research found no significant correlation between the value of a firm’s pollution control patents with its financial performance. However, the value of pollution prevention patents is associated with higher ROA (returns on assets) by 0.5 percentage points.

While it may not sound like much, Professor Cheng points out that for a company such as Microsoft, which generates billions of dollars in profit, a 0.5 percent increase in ROA on FY2022 numbers would translate to over US$1.5 billion in additional net profit.

“For managers, the message is pretty clear,” Professor Cheng concludes. “There have always been questions about whether to go green or not. That relates to the apparent trade-off between going green versus a financial cost. The message from our paper is: You can go green, and you don't need to suffer financially if you choose the right approach. If you choose a pollution prevention technology, you can go green and improve your financial performance at the same time.”