Over the last several years, big data has created a lot of buzz in the business circle. The topic is wide and deep. Sometimes it is referred as analysis or data analytics. According to Harvard Business Review , Data Scientist is the sexiest job in this century. Thousands of data scientists are being hired by both well-established companies and startups. In fact, in some quarters, data scientists are seen as a threat to the advisory capacity of accountants. Before we can explore the impact of big data in accounting, let’s first discuss what big data is.
What is Big Data?
There is no unified definition of big data. It varies across the spheres. The Association of Chartered Certified Accountants (ACCA), see big data as a huge amount of data that is continuously collected and aggregated through various tools and technologies such as the Internet, debit cards, electronic tags, and social media. The convergence in technology, widespread use of mobile devices, and the shift from analog to digital have combined to create a huge amount of data, mostly unstructured. The generation of this data has outpaced the capacity of traditional tools and databases. This informed the coining of the term big data.
An alternative way to look at big data is to take into account the data generated by devices or machinery we use such as automobiles. There are several data that can be captured in your car. The data could include speed, time driven, dashboard settings, amount of pressure applied to brake pedals, GPS location, whether the driver is talking while driving, number of breaks at any particular distance, tire pressures, and much more. An automobile manufacturer with more than 20 million cars on the market will find it impossible to collect all this data.
If you consider the above situation, it is clear that big data has exploded in a variety of ways. First, the data comes in volumes that a typical server cannot handle. The data is often measured in terabytes. Besides this, the data come in a variety of forms because it originates from different devices and sources. Sometimes, the data come in unstructured formats. The speed at which data is being collected has also changed. In a split of a second, data is generated. What is even more challenging is that sometimes this data is incomplete or inconsistent.
Despite the challenges, there are more than one in which such data can be captured and stored.
- Categorical. This way, data is categorized according to predefined criteria such as regions
- Ordinal. Data is ranked according to quality, for example, average, good, excellent
- Interval Data. Measured according to the distance between intervals such as temperature
- Ratio Data. It is interval data that has a natural zero.
One of the challenges that data scientists have to grapple with is that big data has to be cleansed, verified, formatted, merged, and secured before analysis. In addition to this, privacy and security continue to present more challenges. Data access should be restricted to only a few people who can analyze and use the results. Besides this, analytical tools are not supposed to collect personally identifiable information.
Impact of Big Data in Accounting
The impact of big data is evident in nearly all industries. Most organizations are changing priorities. They are facing the new challenge of managing a vast amount of data that is collected every day. Many business leaders are looking into various ways of profitably managing these amorphous data sets without threatening relationships with their customers.
In the accounting sector, big data is useful in adding value to general accounting and audits functions. Big data enable companies to conduct data-driven audits, which is beneficial to both the client and the auditor. Big data is also useful in management accounting especially in identifying and managing risks. In tax, big data offers an improved way of analyzing the efficiency and identify areas where improvement is required. It can also help to identify new opportunities, especially on the global scale. Generally, big data can be useful in making businesses more efficient.
Big data has presented both challenges and opportunities to accounting professionals. It has begun to create ripples in business. There is high chance that a new accounting paradigm will emerge in the next few years. The Institute of Management Accountants (IMA) and ACCA believe that big data has offered the accountant and other finance professionals a chance to reinvent themselves and possibly take strategic and dynamic roles in organizations. Professionals who will have the skills to see patterns in data and translate them into actionable insights will become more relevant to 21st-century business. That said, the transition would not be easy.
In one of its reports, “Big data: its power and perils”, ACCA and IMA pointed out that Accountants and finance professionals can provide new and critical service if they are trained to collect, analyze, and utilize data in forecasting and modeling. The main challenges and opportunities in the next 10 years will revolve around the development of new metrics, the creation of the visual language of data art, and upgrading the analytic skills. To remain relevant and take advantage of big data in the next 5 – 10 years, finances professionals and accountants need to do the following.
- Utilize big data to offer a more strategic role in decision making.
- Develop new methods for valuation of data and take a proactive role in internal controls and compliance.
Use big data and analytical tools to detect risks in real time as well as to boost forensic accounting.
The above tells us that accountants should find a way to measure big data as one of the organization’s asset. It also means that they should use big data as one of the ways to measure organizational performance. This supports the growing trends toward integrated reporting and adoption of non-financial data in company reports to paint a clearer picture of performance.
Naturally, accountants are trained to collect, record, and analyze financial information, so these professionals can expand their cores skills to include non-financial information and other datasets. In the process, they can help make big data more structured and smaller. The increased value that these better skilled professional bring into the organizations can help to shift the finance department from a service function to a strategic-business service.
All of the above will create more challenges in the sector. The future will more likely be defined by both the transfer of skills as well as the development of new skills. Accountants and other finance professionals will need to focus mainly on three areas that big data will have big implications on.
- Increased use of big data in decision making
- Application of big data in identification and management of risk
- Valuation of data assets
The hallmark of big data is that it focuses on non-financial information (NFI) captured at different intervals of a transaction. This is different from the way financial transactions are captured and analyzed. For many years, accountants maintain a double entry system to record transactions. Therefore, the task at hand, for the accounting sector is to connect the financial data with non-financial information.
According to Ernst and Young (EY), big data is fundamentally changing the way audits are conducted. The vast amount of information and the power of data analytics technologies has seen audit departments shift from the traditional audit approach to a more modern one that integrates analytics and big data. With big data, it is possible to expand beyond sample-based to the analysis of the entire population. Intelligent analytics has enhanced the quality of business insights and audit evidence.
The EY report also noted that there are several analytics dilemmas and barriers to integration. The main barrier is data capture. Most companies invest heavily in data protection, so they tend to be reluctant to provide data mainly due to security reasons. In addition to this, auditors encounter different accounting systems such that it is difficult to extract data because neither the companies nor the auditors have the core competence to extract data. The only way big data can be useful is if it is integrated with auditing.
Most of the audit standards were developed long before big data emerged, so there is need to align them with data analytics. On top of this, the audit committee should look into how big data could support compliance and risk. They also need to focus on technical competency development. This will enable auditors to use analytics and larger data sets to identify risk, understand business, and offer a better coverage.
The impact of big data has left finance professionals and accountants at a crossroad. On one end, they can upgrade their skills to adapt to the business environment and to be able to move up the value chain and probably take a strategic role in shaping the future of their organizations. The second option is to do nothing and let advancement in technology downgrade their role. The wider adoption of big data could see organizations transform their financial reporting in the next few years.