Digitization will not change the nature of the ethos embedded in an accounting approach, what digitization offers is more avenues to engage in more things that appeal to us on a more spiritual level. Accountants need to understand the wider concept of digitization, accountants need to open up accounting to non-accounting conditioning elements and influences.
Professor of Management Accounting and the Founding Director of 'LSE Entrepreneurship' at the London School of Economics (LSE), Dr. Alnoor started the third Guest Lecture session that carries the theme: Accounting Disrupted: The Impact of Digitalization by quoting a line from Bob Kaplan's research paper, that is: “We have to engage in operational aspects of organizations in order to better our accounting approaches. ” He also then stated that all these years management accounting has been trying to catch up with the development of technologies. This session was held on 10th June 2021, moderated by the Assistant Professor of Accounting at Universitas Airlangga , AA Gde Satia Utama.
He made a poll for the audience to see how the audience thinks of the percentage of how digitization will change accounting in the future and the results are as how he expected, most of the audience are aware that a major change in accounting is coming and it is because of digitalization. He explained that from the 1960s, organizations were growing very quickly because the demand was there, and when organizations grew very quickly, they tended to focus on the top line, the revenues, and the bottom line tended to have a correlation with accounting.
He explained that there are some forces that are very important for accountants to understand because they imply changes for accounting. One of them is the demographics and easternization. Many countries are changing their demographics, he mentioned how China has a three-child policy to control demographics because it affects the economy. And there will be a shift from westernization to easternization. The economic axis of the globe is also shifting towards developing countries and these countries have many young populations who were born digital, they are the ones who are technologically savvy. Next one is the rise of generation Z, people born after the year 1995. This generation has a different mindset, different way of communicating, operating, and organizations in the future will be filled with them: the digital born generation. This will impact the accounting system in a big way.
He mentioned that accounting has a definition of a process of identifying, measuring, and communicating economic information so users of this information can make informed judgments and decisions, but in the current situation, it has a different meaning for information and data, the users are also changing. “I think this definition is extremely problematic in the age of digital.” He implies. “Right now we have data, not just information. Data is both structured and unstructured. Accountants have been focused on structured information, but now a greater focus is needed in unstructured information, we are not focusing on the past economic transactions anymore. We are looking at accounting and tell what could happen rather than what has happened, a predictive analysis.” He added. However, to make informed judgments about the future requires information that says something about the potential future, and accounting has not caught up with that yet.
He also explained how accounting drives decisions in organizations, it starts from economic transactions, then to accounting data and finally it leads to financial information. For example when an organization buys raw materials from a supplier or makes a sale, there will be an entry in the journal, the economic transaction then captured as accounting data. Then the accounting data is converted into financial information like income statement, balance sheet and so on. He said that there is something missing and that is what happens before the economic transaction, what kind of data an accountant can seek that is the antecedent of the economic transaction. If an accountant can have that data and can give that to the right decision makers, then it will power the organization into the future. So basically, economic transactions cannot be divorced from predictive data that precedes them.
Dr. Alnoor also showed the planning and control cycle that serves as an executive action in digitalizing enterprises. Before digitalization, accountants worked from data that would be converted into financial insights and executive decisions were made from there. However, with the current digitalization, accountants move to the other side of the cycle where machine analysis and machine action will be implemented. He also showed a theoretical framework of Michael Porter, and explained how in a digitalized environment, organizations are required to focus on both differentiation and low cost, and it affects the accounting information organizations need. In the BCG framework, he also stated that there is a difference in the BCG framework if it is in a digitalized environment. He also mentioned theories that will still be relevant in the digitalized environment for accountants, such as the value based costing and activity based costing. He stated that today organizations are focused more on how data generated by machines enables learning and enables action which produces more data. The more data organizations have, the more learning and actions can be made. With this digitalization, many aspects in accounting such as costing and reporting, performance evaluation and others will be going through a change. There are some issues to ponder for accountants, such as: costing will be different, and revenues and expenses come from different places, product/services embedded systems, learning needs unlearning of what we have learned before, strategy couples with operations, digital makes accounting about what is not seen, qualitative issues are crucial, and so forth.
This guest lecture is available on the Department of Accounting's YouTube Channel
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