The Time Is Right to Modernize 400-Year-Old Accounting Practices

Last month, after posting a blog on why it’s time to bury traditional financial management software, I received very interesting feedback from a reader: “So when are you going to challenge the accounting industry, accounting textbooks, and universities to update their practices?” And while Bill McCarthy, a professor of accounting and information systems, has prolifically pushed to modernize “400-year-old” accounting practices, wrote the reader, “until currently accepted accounting practices are challenged and changed at the national or international level, fraud, waste, and abuse in accounting are major issues to be buried in the GL.”

I couldn’t agree more with this feedback. Progress to modernize accounting has been slow and frustrating, but there is a bit of light at the end of this 400-year-long tunnel. The biggest impediment to needed change has been that, during their development, both accountants and accounting software have been “purpose built” to deliver GAAP-based financial statements. It’s time for optimism, though, because change is underway in both these areas that will help make accounting expand beyond its limited and structured view of financial data and become an indispensable driver of business insights.

First, consider the software. When McCarthy first published his REA Accounting Model ideas in 1982—a framework that extends the conventional accounting model for both accountants and non-accountants to accommodate a broader spectrum of management information—technology was not up to the task of commercializing it. Modeling REA in a relational database management system (RDBMS) was more than challenging, and storing and processing the data required to materialize account balances and financial statements directly from business events was prohibitively expensive at a time when the cost to store a gigabyte of data cost more than $200,000.

Today, new technologies such as object-oriented modeling and development (a natural for REA) and the volume processing potential of in-memory database technologies are finally making new approaches to accounting systems feasible. But getting a system actually built that uses these technologies has been a commercial challenge for traditional ERP vendors, because they have decades of effort and billions of dollars sunk into products of 1980s design supporting a maintenance revenue stream that’s the lifeblood of their multi-billion dollar businesses. It is very hard to see these traditional vendors take the wrecking ball to their businesses to completely rebuild their products from the ground up; way too much risk and I don’t really blame them. Their only feasible strategy would be to try to evolve their legacy systems to a new model which, if successful (and that is a big if), would take many years to complete. The only way a new system gets built is when a new provider enters the market to exploit these new technologies to re-imagine financial management software and its role in delivering business insights, and builds it from scratch. That’s exactly what Workday has done.

Second, change is also happening on the professional side. There is some very tangible new thinking taking place in the halls of the academy, the chambers of the regulators, and the corner offices of The Profession around what accounting should be and how it should be taught. Coming out of the recent financial crises, the U.S. Department of the Treasury set up The Pathways Commission to evaluate the current state of The Profession and make recommendations on how to shape it going forward.

The American Accounting Association, the accounting thought leader, has made this a primary mission. I have participated in a number of its meetings, and am very refreshed by the thinking around shaping a modern mission for accounting—one that goes beyond disclosure reporting to deliver actionable business management information. I think this organization is on a path to influencing significant change in the education of future accountants and the practice of accounting.

For our part at Workday, in addition to building the software to support these trends and ideas, I and others at the company have met with a number of professors individually and at forums, including a conference commemorating the 25th anniversary of the REA Accounting Model. We’ve met with some of the authors of the more progressive accounting text, such as “Accounting, Information, Technology and Business Solutions”; have presented at American Accounting Association strategy and planning meetings; have guest-lectured at MBA programs; and continue to look for opportunities to spread the word.

I think overall, there is much to be positive about. Of course, for a profession known for conservatism and a subject steeped in years of tradition, nothing will change overnight. (How long have we been talking about the far more isolated issue of changing lease accounting standards?) There will be lots of bumps along the way, and it will take a while to update technology and talent across the market, but today, for the first time, the pieces are in place. After more than 400 years, I can finally feel Fra Pacioli starting to spin….