Features | From Pivot Magazine

Is the accounting industry in an ‘existential crisis’?

Jon Lukomnik, a long-time institutional investor and corporate governance expert, on the biggest challenges facing the profession

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John LukomnikJon Lukomnik, managing partner of Sinclair Capital and head of IRCC Institute (Photograph by Karen Hatch)

What do you see as the biggest challenge facing the accounting industry today?
Accounting was invented in Florence during the Renaissance, and it worked pretty well until the last quarter of the 20th century. It worked because we traded things, and wealth was created by things. Now, though, we have a world where, increasingly, value is in the intangibles. How do you value a company like Uber, where the value is in the business model? How do you value software code? How do you value brands? Coca-Cola spends hundreds of millions of dollars a year, and our accounting systems say that’s an expense with a positive externality, but if Pepsi bought it, then it would become an asset on the balance sheet. That’s irrational.

What’s the impact of this on capital markets?
Look at Amazon. Right now it’s worth around US$900 billion, and it’s trading at a 94 times price-to-earnings ratio, while its price-to-book is 20. Either we as institutional investors have lost our collective minds to pay 94 times earnings for a large company like Amazon, or we’re not measuring the potential to create future value correctly. That’s what’s happening. One study found that intangible assets account for 84 per cent of the S&P 500’s total value. 

You’ve said that the proliferation of data is eroding the value that accountants provide. What do you mean?
Our regulatory system is designed as a one-way reporting regime in which audited financial statements are communicated once a year. That used to be where everyone started their research from. Nowadays, you can scrape zettabytes of data from numerous places in real time, and artificial intelligence and machine learning can help people use it to make decisions. A lot of it is lower-quality data, but still, now a financial statement is a proof statement of all the information that’s already gathered. The information that’s not accounted for by professional accountants is exploding. To me, these are existential issues facing the profession. Traditional accounting is becoming less and less relevant, and it will be even less relevant when we end this conversation than when we started it.

What can be done? 
There are a lot of really good accountants out there who are doing a good job, but with an increasingly narrow slice of information. There are leaders in the profession who acknowledge these issues, but there’s also a huge base of accountants who are comfortable doing what they’re doing. The place to start is to get the profession’s leaders and their institutions, such as CPA Canada, AICPA in the U.S., the SEC, OSC and the International Accounting Standards Board, among others, to say, “We don’t know the answer right now, but we know we have a problem.” They then need to get together and deal with it. 

Do you think that will that happen?
Well, the only option not worth doing is doing nothing. I want accounting to thrive. There are a lot of smart people in this profession—they need to say, “In three years, we want to know the process we will take to solve the problem, and then that process should take no more than five years before it starts producing results.” At the very least, the industry could ask the standard-­setters to think about what criteria should be used to establish which intangibles should be addressed first. CPA Canada’s Foresight initiative is an example of how to put these issues on the table, but this has to be an industry-wide effort. It should be viewed as a market opportunity. If we can address this, then accounting and assurance will grow in relevance for investors like me, and it will grow the industry’s revenues. This is for the good of the profession.