Reinvigorating Accounting Classes: Thoughts on recent reporting from Bloomberg

Here is another excellent piece from Bloomberg (this is reporting by Avani Kalra , but Nicola White who posted it to LinkedIn has also done meaningful work reporting on accounting and financial reporting as our profession faces considerable change). The Bloomberg piece covers the challenges we face with pervasive negative stereotypes about accounting, how these affect the accounting profession and accounting academics, and how Accounting professors at 美国杨百翰大学 are innovating their accounting curriculum.

https://news.bloomberglaw.com/esg/professors-fold-esg-into-accounting-classes-to-spark-interest and Nicola's LinkedIn post is accessible here.

After reading this I am curious if what they note is less about ESG-specifically and more about actively working to break extremely negative stereotypes about accounting with interesting and applied examples. If you are interested in specifically in ESG, my colleague Jeffrey Hales can likely offer more on his work and class at Texas McCombs School of Business and ESG reporting.

Background

The following are my own comments on my perspectives from teaching all levels (undergrads, MPAs, MSF, MSTC, Fulltime MBAs, Evening MBAs, Houston MBAs, Dallas MBAs and our Executive MBAs) at what will soon be 225 classes (yes, that is more than a lifetime worth of teaching) at the Texas McCombs School of Business. I teach three main classes: first, Financial Statement Analysis, but also Intro to Financial Accounting (historically to MBAs, but recently to undergrads, where we implemented the changes noted here this past Spring) and Accounting Concepts and Research (to our MPA students). Descriptions of each class, which vary from the traditional approaches, follow. [1]

A massive benefit of an exceptionally high teaching load (~20 classes a year, when the standard is 3 classes a year for tenure track or 8 for professional track), is the chance to interact and benefit from an array of students at all levels and across all programs. Teaching, especially in discussion-based classes, offers an incredible opportunity to learn. Specifically, teaching, as reading and high quality podcasts, offers the chance to learn from the experience of others.

"I think you can learn a lot from other people. In fact, I think if you learn basically from other people, you don't have to get too many new ideas on your own. You can just apply the best of what you see." — Warren Buffett noted in All I Want to Know Is Where I'm Going to Die So I'll Never Go There by Peter Bevelin

Survey Results: We have work to do as misinformation about accounting abounds

In each class we conduct surveys. Independent of the class, program, backgrounds, age and experience, there are pervasive and, at times, extremely negative stereotypes about accounting. These perspectives are surely related to misinformation or incomplete information about accounting. Most see it as a set of tedious rules and processes, not as the language of business. Most have never considered or been exposed to why humans created accounting. [2] Even those who are interested in the profession or already in the profession often see the degree as training exclusively for careers in audit or tax or worse, passing the CPA exam. Worse is that even in adjacent areas, most believe (or have been taught) that accounting information is of no value in the applications that many are interested in, such as financial planning and analysis, decision making and strategy, valuation or investing (this is nearly a direct quote spoken at me a few years ago by a colleague that serves as a massive inspiration of the dangers of siloes and stereotypes).

Sadly, the lack of connection to directly related areas is expected as most mechanical approaches to valuation ignore revenue and expenses (skipping right to over-simplified summary metrics EBIT, EBITDA, FCF, etc.) even as the idea of a business and its ability to create value begins as a conversation on the company’s revenue (value to the customer) and expenses (what it costs to provide this value).

For example, the following is the discounted cash flow (DCF) process created by UBS. This is the main formula presented in a 32-page deck. Their approach is similar to the formulas we see in textbooks, slide decks, LinkedIn content and other sources. Quite fascinatingly, this approach completely skips any inclusion on revenues and expenses, yet it emphasizes a series of involved adjustments for specific items (as if the business itself was irrelevant to its value, revenue is not mentioned once n the 32 page deck). (I elaborate more on the essential role of understanding the business via accounting when engaging in Forecasting and Valuation in this article.)

As educators (broadly defined), we have a lot of work to do to break these stereotypes and to show the value of accounting to numerous stakeholders. As I offer in class: accounting should be relevant for any humans who make or are affected by decisions using financial information in a world with uncertainty (hoping that that that applies to everyone willingly enrolled in a business school).

As we document in my Financial Statement Analysis classes, a siloed approach leads to worse decision making outside of accounting (valuation, investing, etc.). In light of the common stereotypes we face, is a siloed approach to accounting more costly? ( David Epstein book Range covers the flaws of overly-siloed approaches, which are common in academia; after the excellent suggestion from former student Miranda Barrigas this book is the first recommendation on my Canvas page and syllabus.)

Happy to promote: An Amazon link to buy Range

To combat this, in our classes we try to focus on interdisciplinary aspects, bring in qualitative information, engage in conversations on the interplay between sales and marketing efforts and revenue (see below), include financial planning and analysis, etc. Many note that it is unique, but also appreciate the non-siloed and applied approach.

Examples:

• Why do companies offer bundles, rebates, rewards and only then how does the accounting treatment match this business reality.
• How do the financials and footnotes help walk us through how Carnival Cruise Line navigated 2020, arguably the most challenging year in its history.

Naturally, most people aren’t interested in the flawed and archaic stereotypes about accounting, but those seeking a return on their educational investment are likely interested in how businesses work, how functional areas relate to each other, in making connections between quantitative and qualitative information, understanding incentives and behaviors, etc. [3]

It's surely harder to teach this discipline relative to others that may seem more appealing (marketing, finance, etc.), but it's our job to make these connections. Most of our students don’t need multiple days on the specific process of the accounting cycle or closing entries or even working through LIFO and FIFO exercises, much like they do not need products like Solid Footing or mindless examples from McGraw Hill Connect, but they do benefit from meaningful applications:

As one example of a stereotype to combat, we ask the following:

The vast majority of students agree with this stereotype, so we have work to do. To break down this alarmingly incorrect stereotype, in the first or second class, I ask students to discuss, in their own words, what are Accounts Receivable or Accounts Payable. [4]

• Accounts Receivable: Expected future cash inflows from prior sales on account.
• Accounts Payable: Expected future cash outflows from items received, but not yet paid for.

Even at the early stages of the intro level we can see how essential accrual accounting is when it comes to predicting future cash flows. If you really want to make the point, ask the following (but, not on the first day of class):

Level 1:

• Assume a retailer like Academy Sporting Goods expects 5% of product sales are returned. If sales are $100, what is the revenue recognized? How much cash is received at the transaction? What is the expected cash that Academy will keep? Are these the same? Why or why not?

Level 2:

• Discuss how accrual accounting better represents the cash the company expects to keep than cash flows themselves. Discuss how accrual accounting’s focus on the cash the company earns and expects to keep is especially important if and when we are building valuation models? What is overstated if we focused on cash flows themselves? What problems does this cause for forecasting? Valuation?
• Apply the core concepts of this question on returns to rewards, volume rebates, warranties and sales taxes. Add in discussions on why companies offer rewards programs, why manufactures offer volume rebates, etc.
• Common responses and the correct answers are below. [5]

Accounting As The Lens Into The Business

As a bias, I’ve always seen businesses as a fascinating extension of people and people ourselves as fascinating… Accounting, as the language of business, offers incredible and amazingly interdisciplinary insights into businesses and people… if we are willing to show this.

As Richard Branson notes, “A business is simply an idea to make other people’s lives better.”

We use lots of examples from David Senra 's Founders Podcast on this point. Importantly, none of the Founders episodes are on accounting or accountants (even as the Rose Blumkins, John D. Rockefellers, Sam Waltons, etc. clearly mastered accounting), but many of the innovative and paradigm-shifting business leaders covered in his podcast greatly benefitted from their knowledge of how businesses work.

For example, I use this slide in every class as it offers a guide on understanding businesses and the interplay among providing value for customers, emphasizing quality, creating a sustainable business, understanding financial statements, etc.

As a side note, finding these examples will be much easier now that as of this weekend I have a subscription to Founders Notes—thanks Sarthak Kaul , that was an amazingly thoughtful gift!

Recent Applications of this Approach at the McCombs School of Business

This past Spring at the Texas McCombs School of Business I led a pilot set of classes to see how this approach would work on two undergraduate Intro Accounting classes—mostly freshman and sophomores.

We conducted surveys (with other sections as the control) and were able to show a statistically significant increase in the interest in accounting. Students comments (including a few posts on LinkedIn) also strongly supported what is noted here. Moreover, and also important, we showed a reduction of the negative stereotypes and misinformation around accounting.

As no good deed goes unpunished, I have been tasked by my department to roll this approach out more broadly in 2025 (I truly want to do it, but as I was already at the highest teaching volume at McCombs, as noted above, so not a ton of extra bandwidth).

There is certainly more work in front of us, but another Founder’s episode works well here as well as I hope I never lose the desire to learn:

Breaking through these stereotypes with relevant examples and interactive sessions is essential and my guess is that this is more important that the specific way we break through. With these experiences, I can see why the approach at 美国杨百翰大学 would also work and applaud their efforts… fascinatingly, we just did a quick vacation in Utah and Devin Mattson , a former student and good friend who lives in Provo was trying to get me to move there (it's a beautiful state):

Suggestions, Comments, Feedback

How else can we make introductory accounting classes more applied, more interdisciplinary, less-siloed? What other ways can we add value?

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Footnotes

[1] The following descriptions of my classes are from my teaching statement:

Financial Statement Analysis is a case and discussion-based class that moves away from the calculation of ratios and metrics (the what of financial performance) that is common in finance and accounting to embrace the how and the why through an interdisciplinary approach. Here we synthesize an array of financial information, including both qualitative and quantitative data, to understand the business, assess the relevance of information and form well-motivated predictions for the future;

Financial Accounting is a class that emphasizes the importance of accounting's thoughtful and logical representation of business events and intertwines the applications of this knowledge in a broad, inclusive and conversational manner that differs greatly from how this is commonly taught. We focus on adding valuable opportunities for non-accountants to truly understanding financial information;

Accounting Concepts and Research is a class that offers a deep dive into the business reasons and economic motivations behind accounting standards, again focusing on the how and why of our existing concepts, principles and regulations more than just the common emphasis on repeating specific rules. The goal is to empower students with the ability to apply their conceptual understanding of accounting to new settings as the world (and accounting) changes across their careers.

[2] Accounting long preceded businesses, currency, taxes, etc. and was a precursor to the written language. Accounting was created to help humans better track the deployment of resources and obligations when transactions involved time and uncertainty. More here.

[3] For example, today a close friend and I discussed how the new PE management demanded nearly a $1M reduction in marketing and sales for a small startup, with seemingly no consideration of the impact on revenue.

[4] That is, accounting clearly focused on providing information that is relevant (offering predictive power), especially when it comes to predicting future cash flows. Finance also helps with decision making in the future, but is also focused on the past (much work in valuation is firmly based on historical data: beta calculations using historical market data, CAGRs focused on past performance, etc.).

[5] Most offer Revenue is $100 (educators have to be comfortable with people thinking our questions are weird). Revenue is not $100. Businesses are not lemonade stands, so revenue is rarely debit cash, credit revenue the same amount... let's stop teaching that over-simplification...our students can handle reality. We recognize $95 of revenue. Cash collected is the full $100, but cash we expect to keep is $95, not $100, Here cash flows represent the bookkeeping change to cash, while accrual accounting represents the cash we earned, the cash we expect to keep. In this example, cash flows would overstate expected cash flows (we only expect to keep $95) and would overstate forecasts or valuations based off of the bookkeeping of cash flow.