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Gen AI, business model transformation, and more with AICPA & CIMA CEO
Barry Melancon, CPA, CGMA, the CEO of AICPA & CIMA, explains why the accounting profession has to embrace generative artificial intelligence (Gen AI) instead of running from it. And that’s not all he’s talking about in this episode of the JofA podcast.
Melancon shares insights on the effect of AI on audit and assurance, how private equity’s entry into accounting is changing firms, how business models themselves are changing, and why he says the world needs accountants more than ever.
This is the second of a two-part conversation. The first part was published in December.
What you’ll learn from this episode:
- The importance and value of a recently published toolkit on Gen AI.
- Why accountants and accounting firms have to embrace Gen AI and understand its risks.
- Potential uses for AI in auditing and assurance.
- The shifts Melancon sees in the business model of firms.
- Skills that CPAs should be prepared to learn, unlearn, and relearn.
- Melancon’s explanation of the “trust equation” as it relates to CPAs.
Play the episode below or read the edited transcript:
— To comment on this episode or to suggest an idea for another episode, contact Neil Amato at Neil.Amato@aicpa-cima.com.
Transcript
Amato: Welcome back to the JofA podcast. This is part two of a conversation with AICPA & CIMA CEO Barry Melancon. Barry, we’ll start with this: Early January 2024, how should accountants be using generative AI, and how should they not be using it?
Melancon: Well, first off, you can’t have a conversation over dinner or with friends or sitting next to a person on a plane and not talk about generative AI or AI in general. Look, first off, I think familiarization is the key for most of our members. Let me step back and say we have prioritized the impacts on AI to the profession. Through all of our technical committees, we need to be able to work with agility perspective, and it needs to be a priority.
How do you use it is going to depend on where you work, what you’re doing. First off, through CPA.com, our technology subsidiary, we’ve issued a great toolkit that has five, I would say, practical use cases that people can experiment with. The other thing is, I probably have at least some people, maybe many people in my firm, if I’m in public practice or in the finance function, who are paying the $20 subscription to the ChatGPT process and play with it.
I do think firms and businesses have to understand their risk of using it and what they put in that system that then becomes part of the public domain. I think they need to be very careful with that. Confidential information and the like is a really important aspect of our profession, and, therefore, how you use AI in that space is a very important part. The reality is, AI will impact how we do things.
We will start to see, even in filing season of 2024, AI affect how tax returns are prepared. We will certainly see how we think about audit evidence come through our standard setting and our guidance processes. How we will look at the planning and risk process and auditing will change because of the availability of AI.
I think there’s probably, particularly in public accounting firms, is some great use cases that will come about on, you know, be it firm practice management, how you respond to emails and how you respond to clients, how you do that more effectively. I think there’s some great use cases from that standpoint, maybe how your research questions coming about. We’re certainly looking at how we provide our technical information differently with using AI. I think all of those things will come about. Now, what I don’t think, unless you are the biggest of the big, is to think about necessarily that you have to develop AI capabilities.
Back in October, we had a session with 45 different companies that are servicing the CPA profession and servicing the management accounting profession. They all had a segment in that two-day meeting of how they’re using AI. There are going to be commercial providers that provide use cases, applications if you want to call it that, of using AI in the function of what we are as a management accounting or public accounting profession, and utilizing those is probably a really good start. At the same time, I would highly say to the CPA, don’t ignore it. AI is not going to put this profession out of business. The uncertainty of AI, the applications of AI, the reliability of AI, the need to provide assurance of [how] AI is utilized. All of those things will have very important roles for the profession in it.
But people are running around saying AI is going to put accounting out of business. It could change accounting dramatically. We could see a day where AI, for instance, would say, we may not have the need for general ledgers. Because what is a general ledger? It’s a characterization of similar transactions into a digestible set of facts. That’s a general ledger. AI will maybe allow us to think about how we gather that information differently as an example. That’s not today, but that could be into the future.
Control environments are going to be really, really important in businesses as it relates to AI. The CPA, the CGMA, the professional accountant in general who is most at risk at AI, maybe the only one that’s at risk, is the one who ignores AI, who doesn’t use AI. It is going to be part of our toolkit. But let’s remind ourselves: We have gone through major technological transformations as a profession. While people who write in the media and stuff like to say the profession is conservative or slow to change, if we’re honest, the reality is, our profession is very effective at using leading technologies as part of its practice toolkits. We’ve done that.
If you think about tax prep software, if you think about spreadsheets. If you think about all of these things that have happened in history and in the more recent times — cloud computing and blockchain and the like — we are very good at being early adopters. If we’re early adopters, we’re going to be successful with how AI affects our profession.
To say it won’t affect is wrong. To ignore it is wrong. To embrace it will be about part of the evolution and transformation of the profession.
Amato: You touched on this some in your last answer. I’m hoping you can go a little bit more in depth on it. What do you see as the role of AI specifically as it relates to audit and assurance?
Melancon: Well, its first threshold point is it’s going to be part of the risk assessment. In any audit, you’re required to do a risk assessment. How the client is using AI, how active it is in AI. Maybe it’s just passive uses that its employees use AI. Maybe it’s building components to use AI and whatever the business is that it does. That’s going to be a really critical component of risk assessment.
How we look at evidence, audit evidence, is a very important part of the risk assessment that will be fueled, if you will, by AI. We have all heard or seen, for instance, where people have used AI to replicate people’s voices to create fake but almost identical voices. We have seen how people have used AI to create fake pictures of people or fake documents. That risk assessment for audit evidence is going to be really important.
Again, it’s not the first time we’ve done this. We did it with, for instance, with cryptocurrencies. There was a question about how can you prove you own a cryptocurrency? How you can prove that you have access to it. We’ve produced guidance on that. We will continue to produce guidance in that environment. Obviously, if you’re dealing with a company that is a big, heavy user or a developer of AI capabilities, the risk profile will even be greater in the planning process.
Then I think you have to look at how your own people use AI. How much reliance do you have if they’re using AI to answer questions? How do you look at that process in an effective way? How does your firm, if you will, do that? If you’re in internal audit, or are you in management or financial accounting, how do your people use AI in determining the proper accounting treatment? Or the determination of transaction sets being there for completeness? All of those things that you would do in any risk profile, you now have to add an AI risk profile into that process.
Amato: Clearly, potentially transformative technology. On a different transformation topic, there’s been a push by private-equity investors into accounting. Would you say that that’s leveled off, or should we expect more on that front?
Melancon: Well, certainly the speed of the transactions has slowed with today’s economy. I don’t think that means it’s over by any stretch of the imagination. I just think the economy of 2023 has caused those transactions to take a little bit longer to come together or in some cases to stop. But the reality is that private equity is seeing the profession is a viable avenue for investment. I think it still remains.
But I do think we need to just step back and understand what’s happening in this. First off, we talk about private equity. What’s the fact pattern with private equity? We have an abundance of private-equity funds that are out there and an abundance of capital that’s in private equity. Private equity needs places to invest. The CPA profession is very successful. When you have an excess supply of investable capital and you have a successful profession, that’s a basic supply-and-demand equation. That’s what causes private equity to see the opportunity in the profession. That is not good or bad. That’s just a fact pattern.
I don’t think that that’s going to end, because we still have an abundance of private-equity funds out there, and the profession is still very successful. Those factors still exist. Now, what’s really happening though, and it’s not just private equity. We’ve seen a firm like BDO go to an ESOP, and there’s four or five other firms that have ESOPs today, employee stock ownership programs. There were certain business issues there. We’ve seen traditional mergers pick up. We’ve seen domestic tied to global mergers of big firms below the Big Four in that environment. We’ve seen firms spin off parts of their firm’s investment advisory parts, certain sophisticated parts that they’ve built up over time, including the biggest firms, the Big Four, but also all different firms. I think we have to fundamentally just step back and think about what is causing this really to happen. What I believe is there’s a lot of factors there. But one of the key components that people fail to think about is that, for decades, the notion of public practice has been driven over a formulaic process.
If you become a partner in a firm, it’s a formula that determines what you buy in. If you retire from a firm, what you get paid on the way out is basically formulaic, based on how much you earned in the last several years or whatever the case may be. Some differences at the Big Four level, but that’s basically the case. It’s not a fair-market-value process. No one sits there and says: This is the value of the firm. It’s going to cost you the fair market value to buy in. This is the value of the firm when you retire. This is what you get paid when you leave. That is shifting.
We have a group of Baby Boomers who are now partners. We have seen the world shift with private equity and other types of businesses, other types of verticals, and we’ve seen those be very fair-market-value oriented. What we’re seeing is firms gravitate to more of a fair value type of process. Firms that sell to private equity, they’re selling the firms on a fair-market-value basis. When an ESOP is formed, it’s done on a fair-market-value basis. Those firms have annual valuations that go about offering people new opportunities for ownership or when they retire and exit.
That’s a fundamental shift in our profession. It’s not been like that for decades. It’s been formulaic to repeat myself, and now it’s moving more so to a fair-market-value notion of how you get into a firm and how you get out of a firm. That’s the underlying driving force that is there.
We could add other forces. The need to invest in technology, the need to pay young staff differently, create different incentive programs, do different marketing and branding, do different training of midcareer people who have to do skill-set shifts. All of those things are added to the notion of the access of capital. The fundamental shift is that the shift is to a fair-market-value basis.
Amato: You’ve said that CPAs have to be able to learn, unlearn, and relearn skills. Other than embracing and understanding and getting comfortable with AI, what are some of the skills that CPAs need to be learning and unlearning [and] relearning?
Melancon: We talk about something called the T-shaped professional. If you think about the trunk of the T, that’s the technical knowledge that we have to have. You can think of it as if we were in Vegas, it’s table stakes. It’s what’s necessary to sit at the table. The cross part of the T is really about these — people use different terms — success skills. It’s the ability to think in systematic ways. It’s thinking strategically, it’s dealing with emerging technologies, it’s communication skills, it’s risk management skills. It’s really elevating our game with all of those skills because that’s what clients and employers really want. When you think about technologies of AI and others, as we talked about earlier, those technical skills are still critically important, but there is a lot of support mechanisms technologically and otherwise that are built around those.
So the cross of the T, those success skills, are very important to make a difference in what you’re doing. How you analyze risk in an audit is really more about success skills than how you do the audit from a technical perspective. How you give the right advice if it’s a tax client or an advisory client. Those types of things are really critical, and that in a nutshell is what it’s about.
We could come up with a list of all sorts of technologies and skills depending on a person’s own personal situation. But the reality at a high level, at a macro level, that’s what it is about reskilling. It’s about the profession bringing a different set of skills to the needs of business going forward. The needs of business are changing because of the complexity and the speed and the technology and the globalization that’s out there, and the profession has to marry those expectations from a skill-set perspective.
By the way, the people that that change is most difficult for are midcareer. Because if you’re close to retirement, that need for change, that gap, is smaller. If you’re entering the profession, you have a lot of digital natives skills, etc., that gives you a head start on a lot of those skills. If you’re midcareer, you have grown accustomed to a certain set of things you’ve been doing for the last 20 years, but you got another 20 years to work, and it’s how you shift in those skills that’s really going to determine your success trajectory in your career.
Amato: AICPA & CIMA have an ongoing business model transformation initiative that focuses on accounting firms. In what ways do firms need to change their business models?
Melancon: First off, it’s not just firms. It’s also management accounting and finance functions. We talk about the future of finance and the transformation that has to occur. There’s a melding point between that in public accounting, because even if you are in a small- and medium-size firm, the need for smaller business to transform their finance functions is critically important, and you probably are the technical trusted adviser in that space.
We have future of finance, and we have leadership documents that help people think about those activities. On the management accounting side, we deal with large companies of how they’re going through transformation and how they want their people to be business partners with the various parts of the business, not just people who provide financial information. That’s part of that business model transformation.
In the public accounting side, first off I need to put a plug in to our Private Companies Practice Section, PCPS, which has lots and lots of materials that we’re constantly adding to, to help use examples of how firms have transformed their business models. It really goes to every aspect of a firm. Clearly, transformation through technology is there.
We would say transformation even on the audit is there. We have our Dynamic Audit Solution, which is about reinventing the audit. That is happening, has happened, and will happen to a greater degree in 2024 and going forward. But it’s about how you think about running a public accounting firm. In a lot of ways, if you think about a firm that’s a pyramid shape, it’s a leverage-based model system. Again it’s been with us for decades. It really came about in the profession in the 1940s, and it’s been the basic model of the firm. Even how people calculate billing rates and the like has a lot of history associated with it.
But what we’re seeing today is firms being very innovative. Different billing models, different shapes of the firms. We call it a fat-middle firm in many cases. Less entry-level positions, more people in the middle, still the partnership group at the top, a fat-middle organization that has different leverage models, different pricing models, different salary compensation models. So when we talk about a business model notion, it really is all of those aspects.
We’re seeing firms today saying, what type of clients do we serve? Do we just limit ourselves to certain industries? Do we just limit ourselves to certain size companies? Do we have certain parameters as to what determines a company we’ll deal with or a client we’ll deal with? Those are business model notions. We’re seeing more rapid change in business models today.
We’ve been talking about it for five or six years now, but we’re seeing that happen in firms. And in our earlier segment, we just talked about outside investment activities, private equity, ESOPs, etc. Those are causing changes in business models as well. If I were running a firm today, one of my top agenda items would be what is it about our business model that we must hold on to?
Private quality is probably there and relationships with clients is certainly there, but what ways do we do business with our clients that should change? Or how do we treat our employees differently? What should that change? That involves, as I said, pricing and all types of things. We talk a lot about a lot of firms that are using subscription-based models to price, not hourly based models.
We could go back to management of accounting practice seminars in the 1980s and people talked about we need to move away from hours as a baseline. Well, that’s actually happening today, and that’s an example of a business model change.
Amato: You said recently about CPAs: “The world needs us.” The new year is a time to celebrate new opportunities, so how do you see 2024 shaping up as far as the opportunities for the profession?
Melancon: I do think the world needs us. I think the world needs trust. I think we are the most trusted profession, and the men and women who are in our profession take trust and ethics and competency very seriously. We should be very proud of that, and we should be willing to talk about that with our clients and our friends and our employees all the time. It is a hallmark of our profession.
When you take that hallmark and you realize that there’s very few places in society that you can find anything like that. We don’t trust government, we don’t trust media, we don’t trust big business, we don’t trust religious leaders. The world is, in a lot of ways, devoid of trust. We live in this highly complex, uncertain, ever-changing, rapidly changing world, and trust equation is critical to people’s success, confidence in making decisions, even ability to wake up in the morning because there’s so much uncertainty there.
Our profession has this incredible golden reputation as it relates to that. How we use that trust effectively, how we nurture it and make it better, and then how we use it to deliver value to decision-making for our clients, or in the case of an audit to deliver the audit or a tax return to deliver the advice, or in the case of management accounting to put good business decision into different aspects of the business. How we use that trust equation is critically important.
I would say the world wants that today. The world wants it, needs it, and is really void of that in almost every segment of society. And to the extent that we can knit those two things together, the prospects of meeting that need is very great, and then therefore the prospects of the profession are very great.
Amato: Barry, thank you very much.
Melancon: Thanks, Neil. Good to be with you.