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  • Computers and Accounting

    Posted by Carl from Chicago on March 17th, 2009 (All posts by )

    Over the years industries change, and are impacted by technology. The famous examples are robots replacing workers on the assembly lines, automated phone systems eliminating the need for manual operators, and the impact of the web on a whole host of systems from journalism to retailing.

    One item that has received relatively little attention is the impact of computers on the accounting profession. This article describes the death of a sole practitioner who ran a small firm and was able to do this without utilizing a computer – the rarity of this situation led to the above headline.

    When I was interviewing much accounting work was done by hand. Computers were used, but they were mainframes, and they basically held the journal entries that were calculated and supported off line. Accountants had many manual worksheets (21 column paper) where you put down your numbers (by hand), “tied them out” to source documents, and made your calculations. The advent of Lotus 1-2-3 which was ousted by Microsoft Excel and other similar programs eventually automated all of the analysis and workpapers supporting the audit.

    For annual reports, they were typed by hand (for smaller companies or pension plans), or sent to an expensive printer for production. Word processors were new and dedicated and difficult to use – we had a print shop full of women (at that time, they were all women) who would take the manual documents and physically type them up and then you’d proof them and send back changes. Obviously this has been passed by with a whole series of programs that allow for this to be done and checked without clerical staff.

    For taxes, forms were done by hand. The earliest programs were used for the corporate returns and complex calculations such as depreciation; I remember thinking that there was no way that a computer would be able to automate all the complexities of the tax code. And while the corporate world still is extremely complex, much of the individual tax world can be done with off the shelf programs that allow tax preparers to bring up the prior year return and do them quickly and efficiently, as well as check calculations and for missed deductions.

    The interesting thing is that while automation has drastically changed the job of the accountant, eliminating much of the word processing, manual calculations, and forms, the number of accountants has only increased. This is probably due to the fact that computers have allowed the government to come up with more complex requirements for financial statements, and Sarbanes requires myriad more processes to be fully documented. Meanwhile, the tax code has become infinitely more complex, with new laws and regulations coming in a flood.

    It seems that Moore’s law, the increasing power of technology, has been trumped by the increasingly byzantine power of bureacracy and our elected officials to add complexity. I don’t have a name as catchy as “Moore’s Law” for this trend, however… but am open for ideas.

    Cross posted at LITGM

     

    10 Responses to “Computers and Accounting”

    1. knirirr Says:

      Would Parkinson’s law cover the effect of which you’re thinking?

    2. Brian Says:

      I don’t have a name as catchy as “Moore’s Law” for this trend, however… but am open for ideas.

      Perhaps ‘Pournelle’s Iron Law of Bureaucracy’?

      “In any bureaucracy, the people devoted to the benefit of the bureaucracy itself always get in control and those dedicated to the goals the bureaucracy is supposed to accomplish have less and less influence, and sometimes are eliminated entirely.”

    3. david foster Says:

      In precomputer days, there were huge clerical staffs doing things like policy accounting for insurance companies, freight-car accounting for railroads, and and check-sorting for banks. Although these have largely vanished, we now have large numbers of people doing almost-equally routinized work in call centers.

    4. Shannon Love Says:

      The increase in accounting complexity is ultimately driven by computers themselves. Computers let us process more complex information more rapidly. That opens up new business and regulatory opportunities that create more complexity which requires more computes and so on.

      Back before computers, companies manufactured a large number of identical units. As Ford famously quipped, people could have a model-T in any color they wanted as long as they wanted black. Such production of standardized units, sold through standardized outlets, required relatively little information to control the system. For example, in the early 80’s Apple computer released at most one new model every year and usually had no more than 3 models in production at the same time. They had only a couple of peripherals. Apple did not do software or services. Each until that left Apple was identical to every other unit in its model number. Customization was done by the end user or by small mom and pop shops.

      Fast forward to today. Apple has 9 models in production at anyone time plus a plethora of consumer products, software and services. Every unit that ships can be customized in dozens of ways. Compared to the criteria of the 80’s Apple ships thousands of different models. All this customization and diversity creates a huge information load. Without computers, such a system would not even be possible.

      Most businesses have experience the same evolution. Computers allow more customized products which creates information complexity which requires more computers. Add in increased regulation and you get a massive boom in the amount of information that all institutions must process.

      Well up until the 70’s, most people who worked in offices did the grunt work of moving, copying and collating information. Only a few people actually made decisions. Now computers do much of that work and people who used to work in the mail room now make judgement decisions that computers cannot make.

    5. Robert Schwartz Says:

      Accounting went downhill when they stopped mailing confirmations to the clients of the firm under audit.

    6. Carl from Chicago Says:

      Ha ha recently I received a confirmation request from an accounting firm for a vendor, the first one in years.

    7. Carl from Chicago Says:

      Hmmm… Shannon I don’t know if I believe that your analogy that improved analytics and decision processes caused by BUSINESS complexity is driving the need for ACCOUNTANTS. Most of that work is being done by specialized supply chain people, data warehousing people, and programmers.

      If you want real analysis, don’t ask an accountant. They are filling out a template somewhere or part of the vast pile of documents for the annual report or tax return.

      I think that the accountants are keeping up mainly with governmental and SEC complexity, not true business complexity. Just my opinion.

    8. david foster Says:

      “Now computers do much of that work and people who used to work in the mail room now make judgement decisions that computers cannot make”…that was how it was *supposed* to work…but in too many companies, people have been stripped of all discretion and turned into arms and legs for the system. There are plenty of retail chain store managers, for example, who have *no* input on what is ordered for inventory in their own stores: this is decided by the omnipotent system.

    9. andrewdb Says:

      The other industry changed by all this is architecture – there used to be entire buildings filled with draftsmen – now it is all done by a CAD program, which calculates all of the fixtures – the days of making profit on change orders because you missed a bathroom are long gone, and so are the draftsmen jobs.

    10. Chrees Says:

      One of my first interviews out of college was with a company that was developing accounting software. Their accounting process was still done by hand. If they weren’t willing to use what they were selling, I didn’t have much faith that they would last. Which, of course, they didn’t.