January 31, 2020

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Robots

PwC recently held an event called “PwC’s Immersive Experience” which sounds like a really dull version of Meow Wolf. In reality, it’s more like CES for accountants. PwC showcases new technology that it’s been developing for clients and staff. This year, it sounds like they’re well on their way to finding the cure for the common auditor:

Among the products shown at the demonstration were Cash.ai, a program that uses artificial intelligence to automatically read, understand and test client documents, including reported cash balances, bank reconciliations, bank confirmation letters, foreign exchange data and the financial condition of the bank, to do a more complete audit of cash.

The Aura Execution Engine is a cloud-based system that streamlines the audit-testing process by using artificial intelligence to make initial selections, validate data and flag exceptions.


As many of you can no doubt attest, auditing cash is a rite of passage for young auditors. It mostly consists of confirming the account balances with banks, and testing reconciled differences between that balance and the balance the client said they had on their books. It wasn’t a particularly difficult area of the audit, but it was the perfect place for new auditors to get started. And once you had it down, it was always a good feeling when you could kick it to newer staff members, so you could spend time on more important things like managing the checklist.

Anyway, with Cash.ai, it sounds like a robot could do a lot of that work now, and no doubt do it better. It’s probably too early to tell what this means for auditing writ large, but mass adoption of Cash.ai would be a fascinating thing to watch play out. I can imagine PwC licensing its creepy robots to firms who no longer want their entry-level auditors doing other work (or simply no longer want entry-level auditors).

Likewise, it’s easy to imagine a world of people auditors who “read, understand and test” the AI programs that are doing the actual reading, understanding, and testing of client documents. But would those people still be auditors? Will they need an auditing background? Probably, but all this will be secondary to the engineering and mechanics going into the AI auditor. When you think about those kinds of possibilities, the future audit all of a sudden seems quite interesting. Whether or not the accounting world is ready for that, however, is another matter entirely.

In the meantime, it is interesting that the AICPA’s most recent report on the supply and demand for public accounting recruits found that “New hires assigned to audit-related services increased 4 percentage points.” So auditing seems to be very much alive, just not in the sense that we’ve known it.

Liabilities

Look, I might be old fashioned, but when it comes to balance sheets, I typically think: 1) Assets are good; 2) Liabilities are bad. If that’s too oversimplified for you, can we at least n agree that assets increase equity and liabilities decrease it, and less equity is bad? It means a business is, at least on paper, less valuable.

So I’m a little confused by the realization that the new lease accounting standard—which brought more liabilities (a lot more in some cases) onto balance sheets—hurt some companies’ valuation. And also that, “If standard-setters decide to shift more information from the footnotes to the balance sheet, it could have a negative impact.” Maybe I’m wrong, but I thought everyone knew that?

Still, I get it. It’s all about perception. If people don’t see liabilities on the balance sheet, they feel good, even if they know a mountain of lease obligations are buried in the footnotes. By dragging them out of the footnotes, accounting rule-makers created one of those “When the tide goes out,” moments. It seems obvious that as more accounting rules bring liabilities out into the open, the more skinny dippers we’ll see standing on the beach.

Tax planning

There’s an old adage that the best way to make a small fortune is to inherit a large one and piss it away. And if you’re a CPA that serves this particular client niche (i.e., vast fortunes), then you know that inheriting money is a far better tax planning strategy, too:

Americans are projected to inherit $764 billion this year and will pay an average tax of just 2.1% on that income, New York University law professor Lily Batchelder estimates in a paper published Tuesday by the Brookings Institution.

By contrast, the estimated tax on work and savings is 15.8%, more than seven times higher. Many higher-income workers pay far more, with the top marginal rate now 37% plus payroll taxes.

Good work (and clients) if you can get it.

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Caleb Newquist Caleb is Editor-at-Large at Gusto. In 2009, he became the founding editor of Going Concern, the one-of-a-kind voice on the accounting profession, serving in the role for 9 years. Prior to Going Concern, Caleb worked as a CPA for nearly 6 years in New York and Denver. He lives in Denver with his wife, two daughters, and two cats.

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