The accountant shortage threatens capitalism's future

Capitalism can't function without a healthy system of accounting. The breakthrough from feudalism to capitalism in Renaissance and Reformation Europe was only made possible by the emergence of professional accountants. And a dearth of accountants — or a dearth of respect for accountants — has spelled trouble ever since. "Over and over again," Jacob Soll wrote in his fascinating history of accounting, "The Reckoning: Financial Accountability and the Making and Breaking of Nations," "good accounting practices have produced the levels of trust necessary to fund stable governments and vital capitalist societies, and poor accounting and its attendant lack of accountability have led to financial chaos, economic crimes, civil unrest and worse."

In Renaissance Florence, 4,000 to 5,000 of the city's 120,000 inhabitants attended accounting schools at any one time, studying the new device of double-entry accounting with its delicate balance of profit and loss. Cosimo de Medici (1389-1464) and other Italian bankers thrived because they kept impeccable accounts (Cosimo himself did yearly audits of all his various branches). Luca Pacioli, a Franciscan friar and mathematician, wrote the first great accounting textbook in 1494.

In Golden Age Holland, in the 16th and 17th centuries, every level of Dutch society, from merchants to prostitutes, practiced double-entry bookkeeping. Public confidence in "the numbers," both at home and abroad, allowed Holland to launch innovative devices such as the first publicly traded company, the Dutch East India Company, in 1602 and the first stock exchange. It also allowed the Dutch to float bonds at a dependable 4% return.

The cult of accounting then passed to the bigger countries — France and Spain for a while but more permanently to America and England. As postmaster general in the mid-1770s, Benjamin Franklin published a pull-out guide to double-entry bookkeeping. Charles Dickens satirized the British industrialists' obsession with numbers in the person of Gradgrind in "Hard Times."

If good accounting frequently led to prosperity, poor accounting invariably led to instability. Fifteenth-century Spain and 18th century France went bankrupt through (sometimes willful) ignorance of financial fundamentals as much as through overweening ambition. (Jean-Baptiste Colbert, the finance minister whose innovations revitalized France, gave Louis XIV an account book, perfectly designed to fit into his pocket, and encouraged him to enter his expenditure every day, but he dispensed with the discipline when Colbert died.) Two of the biggest shocks to the health of the financial system — the 2001 bankruptcy of Enron Corp. (and with it the 2002 collapse of Arthur Andersen) and the implosion of Lehman Brothers in 2008 — both involved dodgy numbers.

All of which suggests that we should pay attention to the cry that has been coming from America's accountants for years: that the profession is suffering from a shortage of talent. Bloomberg Tax calculates that the number of accountants and auditors employed fell by 17% between 2019 and 2021.

The shortage seems to start with supply. Fewer than 100,000 people take the CPA exam each year — the sine qua non for entry into the profession — and about half of them fail. The number of CPA exam candidates decreased by 7% between 2017 and 2018 while the number of candidates who passed all four sections of the exam decreased by 6% (paradoxically, the available numbers on accountants are rather old). University enrollment in accounting courses fell by 4% between 2016 and 2019. According to Deloitte & Touche LLP, 82.4% of hiring managers for accounting and financial positions in public companies believe that recruitment is a "big challenge."

The shortage of supply is exacerbated by a combination of high turnover and growing demand. Accountants have been leaving corporations and audit firms in record numbers, thanks to low morale and early retirement. Though the profession has long known that the retirement of the huge baby boom generation would produce a talent crunch, the crunch has been earlier and tighter than expected because of the Great Resignation. What better candidates could there be for early retirement than numerate people who had spent their lives working hard and watching their pension pots?

Accountants also face more demands on both their skills and their time. They routinely have to measure things that they've never measured before, not least the impact of carbon emissions on the environment, a job that the Security and Exchange Commission's crackdown on greenwashing is making more demanding. The shift to working from home is confronting them with new problems such as valuing off-site offices while new regulations are forcing them to reassess the value of leased property.

They are also becoming the victims of their own cleverness (or the cleverness of their corporate bosses who are trying to conceal as much as they can from the taxman). Auditors must deal with complicated global structures that pass economic activities through various tax havens. They also must deal with variations on EBITDA (earnings before interest, taxes, depreciation and amortization) such as EBITDAR (which excludes rent costs, restructuring costs or both) and "adjusted" EBITDA (which omits a host of expenses).

The labor shortage means that the remaining accountants must work harder under harsher conditions. They are more likely to have to work alone under high pressure rather than enjoying the camaraderie of teams. Blogs about the profession such as Adrienne Gonzalez's "Going Concern" are stuffed with stories of people who've burnt themselves out with marathon work sessions. The entire financial system thus increasingly rests on the shoulders of overworked and frazzled twenty-something Atlases. 

Why isn't supply adjusting to meet demand? One answer, reluctantly conceded by accountants, is that accountants just aren't cool. A painting of Cosimo de Medici shows him holding his bright and beautiful account books. It is hard to imagine Elon Musk posing for a similar portrait. Another answer is that initial salaries are relatively low given the profession's demanding entry criteria (accountants need to acquire the equivalent of a master's degree as well as pass a demanding professional examination) and its grueling work hours. To get the big rewards, you have to become a senior partner of one of the industry's big four giants.

Patience is harder to come by when numerate people have a bigger choice of careers open to them. Time was when accounting was the ideal destination for the class nerd — a good salary and a lifetime of security made up for the tedium of doing books. Risk-averse parents talked about accounting in the same way that they talked about medicine or the law. Today, lots of other jobs for nerds pay higher salaries and offer higher status (or coolness quotient). Why work for one of the big four accounting firms when you can work as a "strategic financial analyst" for a big tech company and help to generate new products rather than just auditing accounts? 

Shaken by the persistent shortages, the profession is debating how to make itself more attractive. How about improving the pay? Though the profession remains wedded to the long-term reward model, it is doing more to attract new recruits by providing bursaries to potential accountants at college or signing bonuses for new hires. Or improving conditions? The Big Four accounting firms are leading the way among major companies in embracing "work from anywhere" policies largely because they are finding the market so tough. "The war for talent is over and talent won," Tim Ryan, chairman of PricewaterhouseCoopers (PwC), the world's fourth largest accountancy with 300,000 employees, said last week. Or raising its coolness quotient? Whereas a recent barrage of cringe-making advertisements shows multicultural teams of accountants high-fiving each other, accounting in the real world is an overwhelmingly white profession which obliges lonely nerds to sweat in front of screens.

The obvious result of the talent shortage is an erosion in the quality of audits. Public companies are finding it harder to get accountants to audit their books and, when they do find them, must often work them harder. Important checks are skipped, and errors (or dodges) go unnoticed. If companies are late filing, then they risk running afoul of the SEC; if they include errors, then they risk fines and adverse market reaction. Even small errors can lead to a plunge in stock prices.

The chances that U.S. regulators will catch errors, or worse, are arguably also being reduced by the shortage of accountants: The SEC faces an attrition rate of more than 6%, with a growing proportion of the work done by temps. Poorer oversight increases the likelihood of another Enron out there: a big company that is playing fast and loose with its finances and will eventually collapse, bringing economic havoc in its wake. 

There are also more subtle consequences. In "Restarting the Future: How to Fix the Intangible Economy," Jonathan Haskell, a professor at Imperial College, London, and Stian Westlake, CEO of the Royal Statistical Society, argue that the advanced economies are in the middle of a confusing transition from an economy in which most business investment went into things that you could kick to one in which it goes into things that you can't touch, such as research and development, branding, management systems and software. This transition is harder to manage if you have a shortage of accountants to think about ways of measuring intangibles.

Dag Detter, a consultant and co-author of "The Public Wealth of Nations," argues that governments habitually mismanage public assets because, with only 8% of the world's accountants working in the public sector, they either measure their value sloppily or not at all. Applying modern accounting methods to these assets, which are worth $156 trillion, or twice global GDP, might release significant resources for the public purse (for example, by spurring the privatization of unused assets) while also encouraging better management. But that can't happen without more accountants. Tellingly, in New Zealand, the country that has arguably done the most to introduce modern accounting to the public sector, an accountant shortage recently caused the Auditor-General to miss statutory deadlines for audits of several public sector organizations.

What are the chances that the cavalry may arrive in the form of new technology? Accounting is just the sort of thing that AI, with its inhuman ability to recognize regularities and irregularities in numbers, is supposed to revolutionize. Software programs can comb through lengthy leases pulling out key phrases or model complex changes in tax laws. Innovations such as online tax software and automated receipts already make the life of regular people a bit easier. And companies such as Trullion Ltd are promising to use machine intelligence and big data to revolutionize a profession that continues to rely on sampling.

But so far, the Big Four have been relatively bad at developing new technology, despite their huge resources, partly because they don't have enough expertise in technology and partly because they have a vested interest in the status quo. And there are also limits to the power of AI (or the power of AI as currently conceived): The most recondite accounting problems still require human judgment and political sensitivity. Bottom line: As the dearth of accountants deepens, look for the problems threatening the capitalist system to multiply.