The Challenges of Digital Economies to Accounting

What challenges does the digital economy bring to accounting?

The digital revolution and the dematerialization of the economy are under way, but what impact
will this have on accounting? This blog presents a short summary of my policy paper “What
impact will the digital economy have on accounting? The challenge of intangible assets’
recognition” (Jeny, 2017), where I aim to shed light on this issue by studying the possible
accounting implications of the digital economy and, in particular, their impact on the role of
intangible assets.

This digital revolution has paved the way for a new era of information, sparking a fourth
industrial revolution, or "Industry 4.0” as it is also known (Schwab, 2017). It is mainly
characterized by the processing of very large volumes of data thanks to the development of
algorithms and mathematical models to support innovative technological solutions. This
transformation is beginning to integrate business practices via the so-called platform economy
and the emergence of global digital giants such as Google, Amazon, Facebook and Apple, as
well as Uber, Airbnb, Alibaba and many others. But the accounting treatment of the transactions
generated by these new players is stymied by the existing accounting frameworks. What are the
limits of these frameworks? Do they take into account all of the characteristics of these digital
transactions or do they need to be revised?

The bridge between this new digital context and firm value lies in knowledge management and is
reflected in intellectual capital, a concept translated as intangible assets in financial accounting.
However, traditional accounting practices do not allow for the identification and measurement of
these "new" intangible assets, hence the importance of managing, measuring and disclosing such
forms of intangible assets from a research perspective. All sectors are impacted by the new
intermediary mechanisms resulting from the digital transformation, the arrival of the Internet and
the emergence of what Rochet and Tirole (2006) refer to as “two-sided markets”. Cloud-
computing, big data, block chain technology, among others, have reshuffled the deck where
business transactions are concerned. The question is does this transformation exacerbate the
existing problem of the recognition of intangible assets?

This policy paper therefore aims:

 to take stock of the possible accounting impact of new transactions arising as a result of the
digital economy, new intangible assets that generate value, and new risks specific to digital
transactions; and
 to provide a literature review of the main empirical works on the role of intangible assets in the
relevance of accounting data and investors' understanding of these data. By intangible items, we
mean all expenses incurred by the company that are of an intangible nature, whether they are
considered as expenses, investments or intangible assets. These refer to R&D, patents and
advertising expenditure. We do not deal with intangible expenses such as consumer satisfaction
or human resources for which empirical results are still very rare and contradictory.
Finance and Accounting in the
Digital Economy: Opportunities
As the influence of digital transformation continues to weigh on African
emerging markets, digital trends and communication platforms are
impacting how accounting and finance professionals deal with and
manage their businesses.

The recent shift and growth in demand for more developed strategies that will
be used to engage customers and stay ahead of the industry have led
accounting and finance professionals to reassess and redefine the relevance of
their sector in the changing digital economy.

Africa is a melting pot with filled with diverse resources and opportunity.

A changing role
Digitalised information as well as cloud-based business applications are set to
dramatically change the role of accountants and other finance professionals
over the next 5-10 years.

Granting that technology is a major driver of change for companies and

industries today, these changes not only bring up unprecedented challenges but
also opportunities that can influence the whole landscape.

According to Steven Cohen, head of Sage One International in a recent

interview on It News Africa, “robotic innovations and smart software bots
combined with affordable cloud-based softwares will lead to a change in
accountant daily tasks.”

To successfully conduct their businesses, accounting and finance businesses will

have to understand the predicted expectations of their clients. Digital
transformation goes far beyond moving from a traditional economy to a digital
economy. It begins with an understanding of digital trends, new technologies,
ICT services, cyber policies and many other elements of the internet of things
(I.O.T) included in ‘the second machine age’ or ‘fourth industrial revolution’.

Looking at the rising growth of more upgraded multimedia networks and

technologies, the digital revolution will bring up a new mindset to which
accounting professionals will have to adapt to better themselves and their
businesses. As artificial intelligence and robotic innovations increase, so do
opportunities for the finance and accounting sector.

Digital support
Previously, the work of accountants and finance professionals require them to
mostly capture and update data, produce reports and do bank recons,
bookkeeping and other tasks.

Today with the use of smart technologies whether online or mobile, artificial
intelligence, opportunities and benefits seems limitless like the increase in
productivity, safer working conditions as well as possibilities for accountants to
step up and become versed in the new technologies, adding to that is the
creation of more high value job resulting from digital transformation.

Cost effective
Digital transformation also bring a cost effective way for accounting experts to
provide better advice to their clients while using affordable and smart online
accounting systems, e.g.: Quickbooks, Sage.

Time to digitally empower

Adding to the fact that opportunity is also brought up to upscale the workforce,
intuitive software paired with artificial intelligence can definitely empower small
businesses to go above and beyond tasks usually entrusted to them, thus
leading to a wide need for more specialised roles in order to reinvent effective
solutions.

Granting that technology driven changes influence the accounting and

finance ecosystem, challenges encountered include:

 Digital technologies are considered highly interdependent: It will

definitely require for the experts to expand their skills and adhere to
new rules of compliance pertaining to their line of work.
 Increasing competition from financial technology
companies: The increasing popularity of FinTech companies is
disrupting the way accounting has been done. This creates a big
challenge for accountants because they are not able to adjust quickly
to the changes – not just in technology, but also in operations, culture
and other facets of the industry.
 Regulatory pressure: Regulatory requirements continue to increase
and professionals will need to spend a large part of their discretionary
budget on being compliant and on building systems and processes to
keep up with the escalating requirements.

Considering the importance of customer service, consumer expectations

continue to rise in the digital age. There is pressure to deliver the level of
service that consumers are demanding.
Furthermore, according to Steven Louw, executive director at KPMG,
“Adaptability and capacity for personal development will be key going forward,
especially taking into account that  technology evolves and workforce behavior
continues to change, this mostly due to the influence of technology and social
media.”

Smart assistant
Adding to that, earlier this year at the Sage Summit, a smart assistant called
Pegg was introduced.

The chatbot, which is the first in the accounting industry, allows users to track
expenses and manage finances through messaging apps – which currently boast
more than 2 billion users worldwide – such as Facebook Messenger and Slack.

Steven Cohen, in that instance, states that “financial roles are no longer merely
to check the numbers and keep the records, but to help the business optimize
their finances. This will mean that accountants will have the opportunity to 
focus on adding value to the business rather than on time-consuming,
compliance-focused tasks such as preparing reports and statements.”

Accounting and finance businesses, looking at the growth of digital revolution,

have the opportunity to learn from the experience of frontrunner countries,
while designing policies that meet their own needs and fit the local context. In
the same line, it will be vital for businesses today to adhere to the new trends
and clearly define what truly add value to their businesses.”