Observations on accounting education in 2021

In 2021, I started teaching “real” accounting: a course aimed at prospective accounting professionals, rather than MBA students or researchers. For most of my academic career, I had taught MBA students with little intention of becoming accountants, or PhD students learning about accounting research. Returning to a course for future accountants, I was surprised by how much seemed to have changed since my undergraduate days in Australia in the early 1990s.

When I was at “Kenso Tech” (UNSW), we learnt about funds flow statements, then a requirement in Australia, but also about the cash flow statements that would replace them. We covered pooling-of-interests accounting even though it was not an approach we could apply under Australian rules.¹ We spent time thinking about “true and fair view” overrides and whether equity accounting was appropriate. Contemporary newspaper articles supplied examples of creative accounting and of people misunderstanding what the numbers meant.

In the textbooks I examined in 2021, the emphasis seemed much narrower: learn the current standards and apply them to familiar business settings. The concern in this note is that emphasis, illustrated by particular textbook editions, rather than a claim about every course or about what is taught today.

What should an accounting education provide?

Applying standards is part of an accountant’s job. But surely reasoning about accounting issues is also at the heart of what makes accountants accountants. I find it difficult to imagine a good legal education consisting solely of learning the current law, with little attention to its development, the problems it addresses, or alternative approaches. Why should an accounting education be organised that way?

The narrow approach is also boring. Trudging through definitions, checklists, and flowcharts can make each new topic feel much like the last. There is little room to ask why a rule exists, what it accomplishes, or whether it is a good rule.

My focus here is financial accounting. Students also study taxation, corporate law, information systems, management accounting, and other subjects that matter to professional practice. But financial accounting is central to the discipline. If students are getting a deep education in accounting anywhere, surely it should be here.

Financial accounting concerns how we represent the activities, position, and performance of organisations. A university education should help students understand the difficulties in doing that, the alternatives available, and the reasons for choosing one approach over another. The standards are a useful starting point for those questions. They should not be the end of the discussion.

What history adds

Accounting for corporate groups offers a good example. Learning a definition of control is easier than understanding why the definition takes its present form. The history of attempts to keep entities outside consolidated financial statements helps explain the problem the definition is meant to solve.

Accounting for Corporate Combinations and Associations by Arthur et al. (8th edition) provides an excellent account of approaches Australian firms used to avoid consolidating controlled entities. That history gives students a reason to care about the definition of control and a basis for thinking about arrangements that do not fit a familiar textbook example.

By contrast, in Financial Reporting by Loftus et al. (3rd edition), I found a definition drawn from IFRS 10 and detailed instructions for applying it, with little of that historical context. A principles-based standard does not automatically produce a principles-based education. Students need to understand the problem as well as the wording of the solution.

The treatment of leases in Kieso, Weygandt, and Warfield’s Intermediate Accounting (17th edition, or KWW) raises a similar issue. The chapter briefly describes a world in which many leases were kept off lessees’ balance sheets before moving into the requirements of ASC 842. But the earlier rules receive too little attention to explain how that outcome arose or what the new rules changed.

There are useful questions here. What did a firm gain by keeping a lease off its balance sheet? Were investors deceived, or did they use the disclosed information to make their own adjustments? What is the difference between recognising an obligation on the balance sheet and disclosing it in a note? Students can learn the entries required by the new standard without ever confronting those questions.

What alternatives add

History is not the only source of alternatives. US GAAP and IFRS sometimes take different approaches to the same transaction. Those differences offer ready-made opportunities to think about the underlying accounting problem.

For example, IFRS 16 generally uses a single lessee accounting model, subject to exemptions such as those for short-term leases and leases of low-value assets. ASC 842 distinguishes finance leases from operating leases for lessees. Both types generally appear on the balance sheet, but their expense patterns differ: finance leases have separate interest and amortisation expenses, while operating leases generally have a single expense recognised on a straight-line basis.

Why two models under US GAAP and one under IFRS? What view of a lease does each model express? What does each approach imply for the pattern of reported profit, and which pattern better represents the transaction? These are accounting questions that cannot be answered simply by looking up the applicable rule.

Loftus et al. provides little discussion of US GAAP.² KWW includes “IFRS insights” at the end of chapters, but lists of similarities and differences are not a substitute for examining why the differences exist. The opportunity is to use the disagreement to deepen students’ understanding, rather than give them another list to memorise.

Standards are choices

There is also a broader issue with presenting standards as though they follow mechanically from a conceptual framework. Standard-setting involves judgement, competing views, practical constraints, and compromise. Students should be able to examine those choices.

The lease standards illustrate the point. The IASB’s project summary for IFRS 16 explains that the IASB and FASB reached different conclusions about lessee expense recognition after considering feedback. The final rules do not tell the whole story; the reasons for the disagreement are part of the accounting issue.

My own suspicion is that the US two-model approach is easier to understand as a compromise that retained aspects of the previous model than as the inevitable application of a single principle. Students should have the opportunity to assess that view by examining the alternatives and the reasons the standard-setters gave for their decisions. A textbook that only explains how to apply the final rules largely removes the question from view.

Has better standard-setting made accounting education worse?

Perhaps more comprehensive standards have encouraged a narrower education. When I was an undergraduate, a purely mechanical understanding of funds flow statements would soon have become obsolete. Understanding the purpose of those statements and the arguments for replacing them had obvious value.

Maybe mature standards make that kind of education seem less necessary. If a student can apply IFRS 15 to a familiar set of facts, why spend time on the approaches it replaced or the choices embedded in the current standard?

But this assumes away much of the work that requires judgement. Transactions change, standards change, and unfamiliar cases do not arrive with the relevant paragraph number attached. Even if current rules could be learnt mechanically, it is worth asking whether that is an adequate ambition for a university degree. Promises to develop analytical reasoning and business judgement need to be matched by opportunities to exercise them.

Some teachers will, of course, supplement their textbooks with richer material. That is welcome, but it also raises the question of why more of that material is not in the textbooks. Developing it from scratch is demanding, especially for early-career academics whose research training may have given them little preparation for this kind of analysis.

I am left with three questions. What reasoning skills should an accounting degree develop beyond the ability to apply current rules? What does it offer a good student who could develop analytical and data skills in another discipline? And what should educators change if their textbooks leave too little room for the history, alternatives, and judgement that make accounting worth studying?

Footnotes

1. To be honest, I gambled that I could skip the material on pooling of interests without affecting my performance on the final exam. Alas, my gamble did not pay off.

2. There is a brief mention on p. 730, in one of the few discussions in that edition of the historical development of a current standard.