Accounting and auditing exist because economies need reliable information, and investors, regulators and the public need reasons to trust it. That task is under pressure from several directions at once. Sustainability reporting has widened the range of information companies must disclose; generative AI is changing what junior accountants and auditors do day-to-day; and trust in institutions, including the professions responsible for verifying financial information, is being tested in markets around the world.

Robert Knechel, Distinguished Professor and Frederick E. Fisher Eminent Scholar in Accounting in the Fisher School of Accounting at the University of Florida, has spent his career studying auditing and the trust that underpins financial markets. He spoke with Professor Karin Sanders, Deputy Dean (Research & Enterprise) at UNSW Business School, about the pace of sustainability reporting, the impact of artificial intelligence on accounting jobs, and the role accounting plays in maintaining trust in the economy.

Prof. Sanders: What is one thing you wish the public better understood about accounting?

Prof. Knechel: Accounting is often mistaken for a branch of mathematics, but it is closer to learning a language. Once you understand the terminology, the calculations follow easily.

I trace the origins of the profession to the stewardship needs of the British Empire, when merchants sent ships around the world for years at a time and had no way of tracking what was happening to their cargo. A system of counting was developed in which agents would board a ship upon arrival at port, take an inventory, and send a report back to London before the ship itself. That reporting function is the root of modern accounting.

"I’d argue that a sustainability report functions as a set of separate reports, each requiring its own assurance process, rather than as a single document"

ROBERT KNECHEL

As capital markets grew through the 20th century, the focus shifted from stewardship to reporting on financial performance. We are now entering another shift, back towards stewardship and outward towards sustainability information, alongside our focus on financial results. At its core, accounting exists because society and the economy need reliable information to make decisions, and auditing exists to keep that information dependable.

Prof. Sanders: How should accounting and auditing evolve to support reporting on sustainability, climate and social impact?

Prof. Knechel: Sustainability reporting is harder to build than most people appreciate. The profession has spent a century debating the definition of earnings and still hasn’t settled the question, yet sustainability reporting has existed as a market-wide concept for broad market reporting for a little over 10 years. Before a report can even be produced, organisations need data structures and processing controls that, in many cases, don’t yet exist.

Progress has slowed over the past 12 to 18 months in the European Union and the United States. Australia, because of its reporting mandate, is one of the few jurisdictions where momentum has continued.

Sustainability is often treated as synonymous with climate and greenhouse gas emissions, but it more broadly encompasses environmental, social, and governance factors that don’t necessarily connect to one another. In financial accounting, a problem in one part of a statement tends to surface elsewhere, but sustainability information in one area doesn’t reconcile with information in another; emissions data says nothing about compliance with child labour laws, for instance. 

Learn more: Three ways data analytics will change the future of accounting

Greenhouse gas emissions are the one area where established standards exist, which is why assurance work there is now common: auditing a company’s emissions data provides no basis for auditing an unrelated area such as child labour compliance. For that reason, I’d argue that a sustainability report functions as a set of separate reports, each requiring its own assurance process, rather than as a single document.

I’d point readers to Accountability in a Sustainable World Quarterly, an online journal aimed at a business readership, for further reading on the topic. I recently hosted an online panel discussing these issues with a regulator from the European Union and practitioners from South Africa and the Netherlands.

Prof. Sanders: How do you expect artificial intelligence to change jobs in accounting?

Prof. Knechel: I don’t have a crystal ball, so I can’t answer that with certainty. The first question worth asking is what kind of AI we’re talking about, since the term encompasses far more than generative AI tools like ChatGPT. AI already operates behind the scenes in functions such as customer service systems and search engines, and I suspect that within five years, generative AI will no longer be treated as a separate category from the AI tools businesses already use.

There’s a case involving a company called PocketOS, where an AI agent encountered a credential mismatch and, in nine seconds, deleted three months of production data and its backups. When queried about its actions, the agent reportedly said it didn’t know what it was doing. The company recovered the data because it held offline catastrophe backups, but the episode shows how much we still have to learn about deploying these systems safely.

"Every client operates its own business model, and our task is to apply expertise to that context rather than follow a formula"

ROBERT KNECHEL

AI is already moving accountants away from data capture and encoding, tasks we stopped doing ourselves some time ago, and it will keep pushing practitioners further up what I’d call the value chain of information, towards analysis. Accounting firms have an opportunity to promote that shift more actively in recruitment than they currently do.

Research on past waves of technological change generally shows the economy and labour force benefit over time, though some workers are left behind in the transition. That raises a policy question for governments and firms about how to manage that transition and prepare the workforce with different skills.

Prof. Sanders: What is the societal problem you hope your research has helped address?

Prof. Knechel: My work centres on trust. An economy can’t function without it, and accounting and auditing exist to give people confidence in management, creditors, investors and the institutions connecting them. If trust in these structures breaks down, the system's benefits are lost with it.

I’ve written a paper using data from the World Values Survey, which asks people in a number of countries a set of questions each year, some relating to societal trust. Countries with high levels of societal trust, including Australia, New Zealand and the Netherlands, tend to invest more in accounting and auditing, since they have the most to lose if the trust system fails. Countries with lower levels of societal trust invest less. My explanation is that a person who doesn’t trust a neighbour or a shopkeeper has little reason to trust an accountant claiming to be a designated provider of trust.

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The same dynamic can be observed in political disputes over which sources of information the public is willing to believe. Without agreement on trusted information, societies struggle to reach agreement on anything else.

Prof. Sanders: When trust in institutions declines, what can academics and practitioners in your field do to rebuild it?

Prof. Knechel: The accounting profession alone can’t rebuild societal trust. The institutions of a society need to be built on trust before any single profession can function within them. I draw on my experience helping establish market systems in Prague in the early 1990s, after the fall of the Iron Curtain (my wife grew up in Czechoslovakia and left the country before the wall came down). Western-style capital markets were established on paper at the time, but failed in practice because participants didn’t believe the system would operate as it did in the West. The result was widespread fraud, where capital raised overseas was funnelled out of companies by insiders before markets collapsed. The region has since spent three decades building the institutions required for those systems to function, and that outcome depended on investment from society as a whole rather than the accounting profession alone.

Prof. Sanders: How do accounting and auditing standards keep pace with new developments, such as cryptocurrency?

Prof. Knechel: Standards can never keep up with new types of transactions as they emerge, since a standard can only be written once a transaction type has become established. Cryptocurrency is a good example: no formal auditing standards yet exist for verifying a company’s cryptocurrency holdings, despite my having researched the issue myself.

"Every client operates its own business model, and our task is to apply expertise to that context rather than follow a formula"

ROBERT KNECHEL

That gap means practitioners need to draw on professional judgement to bridge the period between a new development appearing and a standard being written for it. Standard setters can only collect solutions that practitioners have already tested in the field, while regulators face a similar lag, working to catch up with practices already underway in industry. That’s one of the reasons attempts to fully standardise or commoditise accounting work tend to fall short. Every client operates its own business model, and our task is to apply expertise to that context rather than follow a formula.

My own career has shaped my view of this. I trained and worked as an auditor at Arthur Andersen before moving into academia, and I’ve spent much of my later career studying the gap between the commoditised, standardised view of accounting and the reality that every audit engagement requires judgement specific to the client involved.

The profession moved from being largely self-regulated to being heavily regulated following the collapse of Enron in 2001, and I’ve spent much of the past 20 years working directly with regulators as a result.

Prof. Sanders: What would you tell junior academics about the expectation that research has societal impact, alongside academic impact?

Prof. Knechel: Many business academics are rarely required to explain their research outside academic circles, since most of us aren’t reliant on external grant funding in the way scientific researchers are. My wife works in quantum theory, where researchers have to explain technical work to funding bodies such as the US Department of the Navy in language a non-specialist can follow.

Learn more: Why the modern economy couldn’t exist without accounting

The incentive structure in business schools is built around publications in academic journals, which means faculty aren’t typically rewarded for direct engagement with industry. Identifying and developing academics who can communicate with business audiences is a challenge for university leadership. Accreditation bodies are increasingly including societal impact in their assessment criteria, which I expect will shift incentives over time.

At the same time, I’d caution against expecting all research to have a practical application. My wife’s theoretical work on hydrogen atoms relied on simplifying assumptions to make the underlying mathematics tractable, while other researchers in her field built on that foundation to design molecules with direct applications, including work relevant to treating COVID-19. Business schools need a similar spread of research, from theoretical to applied, with only some academics likely to translate their work for a business audience.