Why the modern economy couldn’t exist without accounting
Chicago Booth Business School Professor Ray Ball reflects on the evolution of accounting, the important role it plays and how AI will shape the future of the profession
A modern economy without accounting is inconceivable to Ray Ball, Professor Emeritus in Accounting at the University of Chicago Booth Business School and one of the world’s most influential accounting scholars. And it’s up to educators of the discipline to bring the social benefits and central role of accounting alive for accounting students, Professor Ball says.
“Accounting is the premier measurement system in the economy. It has its fingers all the way through the economy,” Professor Ball says in a recent interview with Professor Paul Andon, Head of the School of Accounting, Auditing and Taxation at UNSW Sydney. “I can't conceive of a modern economy existing or functioning the way it does without accounting measurements. It's the premier way of figuring out what works and what does not.”
Running an economy without accounting measures would be like flying blind, says Professor Ball, who points out that the Egyptians used a form of accounting to keep count of things while they were building the pyramids. “I can't imagine what the wreckage would be if there wasn't any. I couldn't imagine the modern economy, even an ancient economy, functioning without some form of accounting.”
Professor Ball has held professorial positions at UNSW and the University of Queensland and in the US at the University of Rochester and the University of Chicago, where he earned an MBA and PhD.
In 1968 he and fellow UNSW graduate and academic Philip Brown co-authored the seminal paper, An Empirical Evaluation of Accounting Income Numbers, that revolutionised financial accounting research. He has edited leading accounting journals and was a founding editor in 1976 of the Australian Journal of Management.
Despite the central place accounting plays in the modern economy, there’s a common view that accountancy is grey and boring and little understanding of the good work accounting does. Professor Ball – whose full title is the Sidney Davidson Distinguished Service Professor Emeritus in Accounting at the University of Chicago Booth Business School – says the fault lies with the way accounting is taught. Universities teach accounting rules and procedures and accounting textbooks outline the rules to follow. “The standard joke that goes along with that is that accountants aren't boring people, they just get excited about boring things,” he says.
“We do not teach people what the value is added by this, what is the contribution to the economy? What is affected by what accountants do? How is a company’s price affected? How are decisions affected all the way through the economy? And I think that the I think a lot of the blame lies with us professors,” says Professor Ball, who believes that accounting education fails to get to the meat of the contribution accounting makes to organisations and society.
More than an empty set of rules
Professor Ball teaches the rules and procedures of accounting to students in the MBA program at Chicago Booth Business School, then after he has spent a couple of classes outlining the basics, he shows the students data on who uses the numbers accountants generate. In the debt market, for instance, they’re used for bond pricing, rating debt and so on. And within companies, they’re used to calculate bonus compensation schemes for managers.
“I actually talk about how the numbers are used so it's not just an empty set of rules that somehow were endowed upon the world. It's something that exists for a reason,” he says.
Professor Ball canvassed the question of why accounting matters and how society judges that in his recent paper, By What Criteria Do We Evaluate Accounting? Some Thoughts on The Archival Literature and Economic Welfare, and expanded on the topic at a recent presentation during a visit to UNSW.
“It is difficult to imagine a costly economic activity like accounting flourishing for thousands of years – and in so many civilisations – without mattering,” he writes. “But how does accounting matter? Does accounting contribute to aggregate welfare? How? How does one evaluate an accounting regime?”
Enrolments in accounting at US universities are “down precipitously”, Professor Ball says. Younger students are more idealistic than past generations and aren’t interested in jobs that are just crunching and analysing numbers, and at the same time, the lustre has come off Wall Street a little.
“They're much more socially conscious so I think it's ripe for accountants teaching these people to actually talk about the social contribution of accounting. It would feed into the current generation of students' ways of thinking,” he says. “If we don't do that I think the drops in numbers are going to continue.”
As companies and societies become more focused on environment, social and governance (ESG) issues, there are demands for greater reporting to take into account broader stakeholder interests and even calls for an end to accounting as we know it. Though Professor Ball is unphased, saying that people have been calling for an end to accounting since he was an undergraduate. He says accounting is thriving and notes by way of example how much share prices react to earnings announcements, which are the product of accounting.
He agrees that ESG is a major issue and says that the act of measuring these factors changes them. For instance, once companies started publicly disclosing their mine safety performance, they paid more attention to the safety of their workers. “There's no doubt that ESG disclosures will have an effect of changing the behaviour of companies in relation to ESG issues,” he says, adding that this will also change accounting as it responds to ESG. “There are lots of competing arguments, lots of competing interests. I know the accounting profession is trying very hard to play a large role in it. But where that will end up, I've got no idea,” he says.
Accountants will do more, not less with AI
Professor Ball also considers the rise of artificial intelligence and its potential impact with the perspective that 60 years in the profession affords him. As an undergraduate he worked with Australian company Rheem and used only heavy desktop-adding machines. When computers came along, people said that would be the end of accounting because computers would do everything.
“In fact, what they allowed the accounting profession to do was more, not less,” he says. “So with artificial intelligence, yes, it will cause some disruption in the sense that there are people whose skills will become outdated. But I'm relatively optimistic that artificial intelligence will just increase the role of accounting and will give accountants more capacity to do more things more deeply, to do audits more deeply, do much more than an individual can.”
AI will allow accountants to delve into every single transaction of every single company, rather than just taking some sample transactions as audits currently do.
Reflecting on life at UNSW
Professor Ball says he has a great deal of affection for UNSW, where he graduated with a first-class honours degree in accounting and the University Medal.
Neither of his parents had gone past third class and it’s unclear to him if his mother received any schooling at all, but somehow Professor Ball ended up as an undergraduate at UNSW over 60 years ago. “It just opened the world to me, it was so expansive and it just fundamentally changed my life,” he says of his four years as an undergraduate at the university.
Professor Bill Stewart introduced him to accounting literature, which started Professor Ball’s career as an accounting academic.
He was also the first academic appointment at UNSW’s Australian Graduate School of Management, as Professor of Finance. He stayed there for “10 lovely years”. Professor Ball has also received an honorary doctorate in business from UNSW in 2010, in recognition of his enormous contribution to accounting scholarship, which he describes as “one of the proudest things I have”.