CHAPTER 1
History of the Accounting Profession
From Compliance to Advisory

You could say that accounting is literally in my blood. My grandfather's family immigrated to the United States from Russia in 1909. They lived in an immigrant neighborhood in Minnesota, a tightly knit community where everyone set their sights on a better life.

As immigrants, my family saw accounting as an attractive profession because it supplied a steady job. At the end of the day, every type of business needs help keeping their books.

My grandfather worked hard and became a Certified Public Accountant (CPA) in 1935, in the depths of the Depression, and early in the formation of the accounting profession in the United States. He worked as a CPA until 1977, when he passed away. Throughout his career, he experienced massive shifts in the accounting profession.

From the stories I have heard about my grandfather, he was not today's model of a CPA. He saw the business as not just a way to earn a good living to support his family, but as a way to help his community. He was a one-person operation. He cultivated clients by word of mouth. He had an office with some contractors and used the traditional paper ledger and sharp pencils.

Of course in his days-the Stone Age of accounting by today's standards-accounting was strictly pen and paper. The lone piece of technology was often a 10-key machine. The "cloud" was folders in filing cabinets, each carefully labeled and arranged. These were the polished wingtips and bow ties days of accounting.

What made his work as a CPA different from that of many of the CPAs of today is that back then, 100 percent of his business revolved around personal connections. As an immigrant himself, living through the Depression, he worked to help other small business owners thrive and achieve their goals of protecting their assets and families. The thinking was simple: If he helped the business grow then his practice would thrive in turn.

My grandfather was what I like to call a cherished advisor. He was not just an accountant in the traditional sense. His practice was about building partnerships with clients. What could he do to make their business better? He made a personal investment, and it paid off.

As I grew up, what I heard about my grandfather was that he got to know his clients-and they got to know him. He met with them on a regular basis and sat down with them to go over their financial reports. He listened. They asked questions. He offered advice and insight. They were a team, and they worked together.

I was also told about how he would trade services with his clients, such as receiving a new fur coat for my mom each year when she was a child, or season tickets to the symphony. As times were financially strained for most people, these arrangements built strength in the loyalty of his clients because he was part of their struggle and wanted to find ways to help.

My grandfather's generation had a unique perspective on the industry from its beginning. They experienced perhaps the greatest evolution of the accounting profession. It began with little regulation and expanded to an extreme ramp-up of tax codes and accounting principles for businesses and individuals. Organization practice evolved from manual paper filing to the development of innovative technology such as accounting software and the industry-changing cloud technology, enabling information to be filed away with a few mouse clicks.

TECHNOLOGY AND HUMANS

Yes, technology has been wonderful for our industry. With each improvement in software, it has aided all CPAs to complete our work faster. This ongoing evolution in our industry has never meant that there is less need for an accountant or a bookkeeper in business. Our generation now experiences the most profound advancements in cloud technology with machine learning, artificial intelligence, new economies, and alternative currencies.

Many fear that the traditional data entry tasks of accounting professionals and bookkeepers will be reduced, or even disappear. But it is actually the traditional tasks of accounting that we are meant to do. We should work toward getting back to the kind of client relationships our profession once cherished, like the relationships my grandfather experienced.

Due to the increase in compliance with regulations that were placed upon the industry over the decades, and technology not moving fast enough to help us, we may have lost something vital in the process: our advisory relationship with clients.

Instead of striving to improve our client's business with the financial information we provide, like my grandfather did, we have had to spend the majority of office hours trying to keep up with ever-increasing deadlines and extensions. Our only real connection with clients is when we present facts and figures via e-mail. Otherwise, we only sit down with them maybe once or twice a year, just like seeing our dentist.

When was the last time you met with clients? I mean really met with them. When did you sit down and discuss their goals, short- and long-term objectives, and where they need the most help and guidance?

The human side of accounting can never be replaced by technology-only enhanced. Accounting professionals now have an opportunity to create real value for their business-owner or CEO clients. The advances in technology can free up our time, which can now be devoted to more meaningful client conversations beyond just communicating the analysis of their financial data. This approach can change the dynamic and outcome of your CPA-client relationship. You can help your clients make informed decisions about cash flow, business forecasting, and financial strategy to help them succeed and thrive. In other words, you can become a cherished advisor.

As a cherished advisor, the accounting professional becomes an integral part of the real-time decision making process. The process becomes proactive-rather than reactive-as you better understand both the operational and financial sides of your client's business. As a result, you, the CPA, become a strategic partner that the business appreciates and highly values.

Now is the prime time to move forward into the next generation of accounting. And you can do this by looking backward.

By learning the lessons of how accounting used to operate, and taking advantage of the current and future generations of accounting professionals, you can create vertical industry niche practices in your accounting business from which you offer outsourced advisory services for specific industries-and build or grow your practice in ways that were never before possible. You can become a cherished advisor for this next generation of clients as your take your practice into the future.

LOOKING BACK ON ACCOUNTING

To understand where we need to go, we first have to look at where we came from. As the world changed how it conducted business, and as new countries were developed with expanding governments, the accounting industry slowly was bogged down in regulations, new tax laws, and financial oversight. Exploring the evolution of accounting can provide insight into where we may have gotten off the path of personal connection and how we can find our way back.

Have you ever heard of Luca Pacioli? He is often regarded as one of the founding fathers of accounting. In 1494, he first described the system of double-entry bookkeeping used by Venetian merchants in his book of mathematics, Summa de Arithmetica, Geometria, Proportioni et Proportionalita (Summary of Arithmetic, Geometry, Proportions, and Proportionality).

Businesses and governments had been recording financial information long before this, but it was Pacioli who was the first to describe the system of inputting debits and credits in ledgers, which is still the basis of today's accounting systems.

For the next 200-plus years, through the 1700s, both large and small innovations were added to the double-entry records approach. For example, the East India Company-the powerhouse trade company of the 18th century that linked the East Indies with Western Europe-strengthened the concept of invested capital and dividend distribution. As a result, they could attract more investors to fuel the enterprise through expansion and investment in stronger business practices. This approach also created the need for a change in financial accounting and managerial accounting. The first was how the company presented its financials to gain investors, and the second was used so that the business could be run as efficiently as possible.

In America, the first big change in accounting occurred in 1862, at the height of the Civil War. This is when President Abraham Lincoln approved the creation of the Internal Revenue Service (now more commonly known as the IRS) and the nation's first income tax. The IRS was a revenue-raising measure to help pay for the war's expenses. The IRS levied a 3-percent tax on annual incomes between $600 and $10,000, and a 5-percent tax on income more than $10,000. The new taxes created a surge in accounting because everyone's income had to be recorded and reported to the IRS.

At the same time, the concept of business was changing. Originally, the concept of business was to do one thing at a time. Take the agriculture business, for example. A farmer would raise sheep for wool. The wool would be sold to a company who would make a sweater, or some other garment,...