The CPA Vision Project and AFTF

By Humphrey Nash

(Should be read with CPA Vision Report)

The CPA Vision Statement is an excellent analysis of where CPAs are now and where they should be in the future.   It also suggests, in general terms, how CPAs might make the journey into the future.   AFTF stands for Accounting For The Future, the title of a draft proposal for a prospective account model.   This draft proposal was written by Humphrey Nash and is a biased, naïve, and inadequately researched analysis of where CPAs are now and where they should be in the future.   Despite its deficiencies, it provides a somewhat similar vision of accounting.   More important, it charts a specific course of action that may help accounting make its journey into the future.   AFTF does this by providing fundamental theory, reliable methodology and feasible structures for accounting.   It can, I believe, significantly enhance the value of the CPA and significantly expand the opportunities for the CPA.

Initial Vision Statement

It is stated that "CPAs deliver value by:

1. Communicating the total picture with clarity and objectivity,

2. Translating complex information into critical knowledge,

3. Anticipating and creating opportunities, and

4. Designing pathways which translate vision into reality."

This is a fine statement of purpose, but it doesn't represent what accountants do today.   Of course, this is the purpose of a vision statement … to change and improve upon what is done today.

The following comments outline some areas where CPAs will have difficulty fulfilling their vision and some solutions to those difficulties.

1.  GAAP accounting is incomplete and does not communicate the total picture.   GAAP accounting does not recognize "accounting intangibles" which translate into future values.   These values are real and have a value in the present, which is well recognized outside of financial reporting, for example, in the capital markets.   See the section The Problem of Completeness in Chapter 3 of AFTF.   The draft proposal outlines a solution.

2.  The critical knowledge for the shareholder, and by extension for management and stock analysts, is shareholder value.   GAAP accounting does not attempt to report shareholder value.   The vision statement repeatedly refers to value, but current developments seem to be heading in the wrong direction.   The Model of Business Reporting (MOBR) that the FASB Business Reporting Project is now considering is a regressive step.   It proposes adding significantly more detail and complexity to financial presentations.   It translates information into data!   Accounting has a duty to process information and produce positive value.   See Appendix 10, Comments on the AICPA Report of AFTF.

3.  A retrospective (cost-based) accounting model is inferior to a prospective (value-based) model at anticipating and creating future opportunities for clients or for CPAs.   AFTF outlines a decision-useful, value-creating accounting model.  This model unifies all accounting and would expand and enhance the current role of the CPA.

4.  Creating a pathway to the future requires a prospective view.   Accounting intangibles are the dominant values for the future.   AFTF incorporates intangibles into expected cash flows and into present values.   The old path of accounting only for tangibles and only for the past doesn't lead to the future.

The Vision Statement mentions "sound business and economic practices".   Business practices and economic values have not been a feature of traditional accounting, but they are a feature of AFTF which adopts those practices and values.

I agree that the good news is the great opportunities available for accountants.   The bad news is that "The future will not mirror the past" and that a change of perspective and a new accounting model is needed.   Change is uncomfortable; the alternative may be fatal.

Caution: I think it may be a mistake to cast accountants or CPAs as the visionaries or strategists of the future.   Accountants would do well to stick to their traditional roles of providing a defined service function.   For one thing, the business world is much too complex for any single profession to do everything.   Second, management has a legitimate role in providing vision and strategy and assuming risks.   Third, there is a great and vital need for relevant and reliable financial information on which strategies and decisions can be based.   Fourth, accountants would to well to delegate uncertainty and inevitable failures to others; accountants will have enough responsibility with the expanded scope of their traditional functions.

Forces Impacting the Profession

Non-CPA Competitors

I agree that there are a number of non-CPA competitors not bound by the profession's code of standard, practices and ethics.   This is not desirable from several standpoints.   AFTF would change that by unifying all accounting technologies and providing CPAs and accounting organizations with a broader oversight role.   CPAs would be the quality control engineers for all valuation and decision activities, not just financial reporting.

Decline of New CPAs

The number of young people entering accounting may be declining because of opportunities elsewhere, but also because of the relative lack of opportunity within accounting.   A free society rewards value creation; the inference must be that accounting does not adequately support value creation.   A prospective accounting model can better support value creation.

Borderless World

There is an increasing need for uniqueness, uniformity and universality in accounting as the role of accounting becomes global.   AFTF is based on the universal and unequivocal realities of cash flows and capital markets valuations.   This can be the foundation for accounting principles and practices that are uniform across national boundaries.   This can expand opportunities for CPAs

Technological Advances

AFTF harnesses and integrates advanced technology.   It makes extensive use of computers hardware, software, and databases.   It makes use of new principles, practices, methodology, and disciplines.   It makes use of those people who are equipped by reason of training or experience for the information age, either the CPA or those that the CPA oversees.   It makes use of a necessary and natural division of labor.   It structures and defines an appropriate degree of specialization and responsibility.

Pressure to Transform Finance from Scorekeeper to Business Partner

Traditional retrospective accounting keeps score.   A business partner provides relevant decision-useful information.   Relevant information for businesses is shareholder value.   AFTF is a shareholder-value based decision model.   It is also an accounting model.

Market Value Shifts

AFTF would expand the role and relevance of accounting and the CPA.   The actual value and, consequently, the perceived value of the CPA would be enhanced.   For example, the auditing role would include the quality control of all business information used for decisions.   This results from the unification of financial reporting and other accounting technologies.

There is no great value to tax preparation.   It is a necessary job, but doesn't conform to any cohesive or logical theory.   It doesn't support value creation.   A true value-added tax has some rationality and might, for example, be a way to eliminate the double taxation of dividends.

Leadership Imperative

Management has the primary responsibility for leadership, but the accounting profession can show leadership by acquiring new prospective accounting skills and insights.   The accountant should not just observe and record the train of events.   He should not just be a passenger in that train.   He should be the train engineer responsible for where the train goes and how it gets there.   In no event should the accountant stand in the way of the train.   That would be the antithesis of leadership - and would be fatal.

Technology Displacement

"Many of the traditional essential skills of CPAs are being replaced by new technologies".   One answer is for the accountant to himself employ new technologies to the fullest.   Another answer is for the accountant to exercise firm control over those technologies.   Accounting unification would extend and improve that control.   The best answer is for the accounting profession to create new technology.   Technology is not the problem.   It is the solution.



One insight of the Visioning Process is that "CPAs have far more in common than they realized, …"   The AFTF draft proposal was designed to identify essential purposes and unify accounting around common principles.   These principles are not traditional financial reporting (GAAP) practices, but are naturally evolved accounting technologies, such as, capital budgeting technology.


The "360-degree view of the business and economic marketplace" must include a view of the future.   The degree to which accounting looks forward to the future will, in my opinion, be the degree to which accountants can look forward to a future.   If accounting wants to be a part of the future then accounting must make the future part of itself.


The table showing the difference between leaders and followers is very revealing.   The focus groups and interviews show that accountants, by their own admission, are primarily followers.   This, in my opinion, is an occupational hazard due the retrospective nature of traditional accounting.   A prospective accounting model would, in one flash, transform accountants from followers to leaders.   In a sense, AFTF is an accounting blueprint for leadership.

Perhaps more revealing and important are those comments from those students who were pursuing non-traditional accounting degrees.

1.  They wanted better opportunities than traditional accounting would provide.   Since the job market rewards value creation traditional accounting must be inferior, in this regard, to non-traditional accounting.

2.  They wanted broad skills to provide a general ability to meet new demands.   This concerns me because I believe that the accountant's plate is full.   My solution to this problem is a natural division of labor into management decisions and assumptions, modeler's development of expected cash flows, and the accountant's oversight and reporting.   In this way the accountant would be part of a general corporate ability to meet new demands without having undue educational or responsibility requirements.

3.  Accountants were perceived as involved with minor, tedious or methodical tasks.   If this is true then technology can be brought to bear.   The computer is well suited to such tasks.   I believe the problem is different.   I believe that accounting is caught up in a web of its own complexity and irrationality.   AFTF will simplify and rationalize accounting.   For example, many FASB statements are fixes for fundamental problems in the accounting model.   Fix the model instead.

4.  Accountants were perceived as not involved in decision-making aspects.   AFTF is a decision-oriented model.   It attaches values to decisions not to traditional accounting assets or accounting liabilities.  It is difficult to understand global economic issues when traditional accounting does not measure economic value.   AFTF measures economic value.

5.  CPA educators were perceived as having a narrow focus.   AFTF would unify accounting and would permit a fairly recognizable role (bookkeeping, financial measurement and reporting, auditing) within a broader context.   Accountants would be a vital part of the management and decision processes.   Educators would have important research, development, educational and implementation roles for the new accounting.   It may be time for accounting education to explore new territory

Comments on Selected Accounting Cores

Core Values

The enduring core values of accounting are an important ingredient of the excellent reputation that CPAs generally enjoy today.   One of the five identified core values is that CPAs be "in tune with the overall realities of the business environment."   This is problematic.   Real business values are not accounting values.   Decisions are not based on traditional accounting measures.   The core value statement is appropriate; the current implementation is not.   AFTF is shareholder value-based and geared at decision making.

Core Services

Assurance and Information Quality

Providing assurance of information integrity and quality is a fundamental CPA function whose importance is only clear when the integrity or quality breaks down.   Companies and economies depend on accurate information.   Companies and economies also require relevant information.   This must be decision-useful information based on business measures.   Unfortunately these measure are not traditional accounting measures used by CPAs.   They more closely resemble those measures used by MBA's or in finance or in economics.   To be specific, those measures are present values of expected cash flows based on a cost of capital.   AFTF provides such measures and supports the integrity and quality functions in a general context, which includes financial reporting.

Technology Services

Computer technologies must be fully exploited and carefully controlled.   In addition, new accounting technology should be utilized if it improves objectives and decision making.   Traditional retrospective accounting does not provide clear or useful objectives.   One objective, which has some rationality, is consistency with past practices, but this objective is in conflict with other more important objectives, such as, relevance.   The objective of AFTF is capital efficiency and the means for achieving that is to base the AFTF model on shareholder value measures.   This also provides a transparent decision tool since positive decisions correspond directly to positive valuations.

Management Consulting and Performance Management

How can traditional accounting provide "advice and insight on the financial and non-financial performance" when traditional accounting measures neither financial performance nor non-financial performance?

Financial performance measures must take into account future expected cash flows and the cost of capital.   This is done in all other accounting disciplines, other that traditional "financial" reporting.   Financial performance measures must use the capital market's yardstick.

Non-Financial performance is currently ignored by accounting, as if it didn't exist and had no effect on current or future value.   The reason for this is that non-financial performance is unrelated to traditional accounting measures.   For example, an insurance company may hire and train a large number of sales representatives during a period.   This will be costly and traditional GAAP results will be depressed, even though value has been added to the company.   The CPA adhering to GAAP accounting does not recognize or report such non-financial performance.

With AFTF actions and decisions which have future value also have a present value; there is no conflict between financial reporting and financial values.   To manage performance actual performance must be evaluated.   One way of doing this is to compare actual performance to a standard.   The standard used by AFTF is natural and useful; actual performance is compared to expected performance.

International Services

On a fundamental level the adoption of a uniform accounting standard would "facilitate commerce in the global marketplace."   AFTF is based on universal realities and values shared by all and can provide such a standard.   More important it provides relevant value measures, which are required for efficient value creation and efficient global commerce.

Core Competencies

Strategic and Critical Thinking Skills

Accountants are not generally known for their strategic thinking.   They are perceived as involved with minor, tedious or methodical tasks.   They are perceived as being more concerned with the past than the future.   No wonder, since accounting is retrospective.   If accountants want to be forward looking they must adopt a new prospective view and prospective measures and prospective reporting.   AFTF is prospective.

Focus on the Customer, Client, and Market

Traditional accounting has no tools for such a focus. AFTF automatically gives financial weight to these factors via expected cash flows.   All such cash flows are future cash flows making the accounting system anticipatory.

Technologically Adept

AFTF is a value-added technology optimized to adding value to clients, customers, and employers

Future Forum Highest Rated Issues

Accountants will be market-driven when they add value to management and to the capital markets.   They can retain a fairly traditional role (bookkeeping, financial measurement and reporting, auditing) within a prospective accounting system.   This will give them greater relevance and a broader utility within a unified accounting model.   This will increase the opportunities and enhance the reputations of CPAs.


We live in a complex world where specialization is necessary.   Successful enterprises have integrated specialized functions into large structures that are efficient and effective.   AFTF acknowledges the magnitude and scope of the prospective accounting.   It suggests a natural division of labor into three parts: management, modeler, and accountant.   Since AFTF unifies all accounting technologies, there will, I believe, be a net savings in effort.   CPAs will oversee the entire process within a body of accounting principles and practices.   CPAs will be overseeing a much broader range of functions within a much more forward-looking decision-useful framework.


I think CPAs would do well to wean themselves from the teat of regulation.   The dependence of CPAs on the GAAP edifice or on FASB's requirements retards independent growth.   I am not suggesting eliminating FASB as the premier standard setter.   In fact, I envision a powerful role for FASB is establishing fundamental principles and general practices for prospective accounting.   However, if FASB will not take the initiative then somebody else must (AICPA, SEC, IASC, the private sector, state regulators, academia).

Accounting organizations seem to be tied to tradition and frozen by fear.   If no accounting organization takes the lead then the lead will be taken by someone outside of traditional accounting.   This will happen.   In fact, it has already happened to a large degree.   There are many others using prospective accounting technologies without accounting oversight.   AFTF would reverse this.


Even within financial reporting there is increasing use of economic value measures and forward looking information.   This should not be suppressed, but it should be controlled.   It should be controlled within a rational and cohesive accounting model, such as AFTF.   If this is not done traditional accounting will become a footnote … and so will CPAs.   There was a time when the balance sheet and income statement were preeminent in financial reports.   Now such statements are buried.   The implications are clear.

Selected Implications

The following are quoted from the discussions of core implications:

"new competencies and skills"  "broad base of knowledge"  "new standards or guidelines"  "need to align with other professions"  "ability to provide unique value"  "Requires development of new non-traditional skills, competencies, and services"  "Requires development of wide variety of new skills"  "Involves the use of non-traditional methods"  "Requires more strategic alliances"  "Requires expanded skill sets"  "Requires focus on adding value"  " Requires a proactive rather than a reactive stance"  "Requires forward rather than historical thinking"  "Requires useful formats for presentation of information"  "Moving to a strategic results-driven profession implies that CPAs must not let themselves become stuck in the current rules of the game, but rather leapfrog to meet new demands and realities of future paradigms."  "Change feels uncomfortable … most people resist change."

It is clear that the accounting profession recognizes the need for change.   It is also clear that the accounting profession is uncertain how to change.   That uncertainty is uncomfortable.

Economic Platforms

The Economic Platforms Chart was very interesting.   CPAs fall, in my opinion, mainly in Platforms 1 and 2. AFTF would shift accounting to mainly Platform 3, but accountants would not be alone on that platform; they would be accompanied by management and the modeler.   Accountants should not entirely abandon Platforms 1 and 2 since accountants provide critical structural and oversight functions.   Those platforms are not unimportant; all other platforms rest on them.

The accounting profession and its professional bodies, as distinguished from the individual accountant, must adopt a longer-term focus and act at a higher level.   FASB seems stuck at level 5, issuing many industry specific statements.   I would like to see FASB and the AICPA operate primarily at level 6 and increasing at level 7.   The accounting profession and its professional bodies should research, develop, promote, implement, and enforce general principles and general methodology.   It is expected that AFTF will substantially decrease the need for industry or case specific official statements.   This is because AFTF espouses a central rational purpose providing both a bright beacon and a clear standard.   Platforms 4 and 5 seem to be at the corporate and technology levels respectively, i.e., above the individual CPA level of action and beneath the CPA profession level of action.

AFTF

Conclusions

The accounting profession understands the need for a prospective view.   However, the profession is naturally reluctant to abandon its traditional model since the relevance, reliability and feasible of a prospective model has not been established.   AFTF seeks to do this by

1.  Basing the prospective model foursquare on capital market (economic) values to produce relevance

2.  Employing strict disciplines and disclosures, e.g., dual validation, to produce reliability

3.  Unifying, simplifying, and dividing the labor and responsibilities to produce feasibility.

Prospective valuation methods are in wide use in other professional communities.   It is not a great risk for financial reporting to adopt similar accounting strategies.  AFTF suggest mechanisms and structures to make prospective accounting relevant, reliable and feasible.   Since AFTF unifies all accounting, CPAs can leverage their resources by expanding their scope and maximizing their utility.   AFTF proposes a continuation of traditional CPA functions (bookkeeping, financial measurement and reporting, auditing) so that the profession can capitalize on its history.

Vision Statements represent substantial efforts and achievements.   It is unfortunate that such statements are often ignored or quickly forgotten.   The best intentions are seldom carried through.  AFTF provides a vision of the future similar in many ways to the CPA Vision Statement.   It also provides an action path with which to realize that vision.