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Why digital accounting is crucial to the modern accounting practice?

In this article, we examine the impact of cloud based technologies on the traditional accounting practice by asking the question: why digital accounting is crucial to the modern accounting practice?

Global accountants headcount
In November 2018, the CCAB reported that globally, as at 2017, there were 536,400 professional accountants from the combined membership of the five CCAB bodies – ICAEW, ACCA, ICAS, CIPFA and Chartered Accountants Ireland. Of this total, the UK was said to have around 326,200 and 38.000 in Ireland.

Practicing accountants
One metric that highlighed the scope for disruption of the desktop accounting software market was the 181,000 UK accountants in practice. This figure does not include the growing number of licensed bookkeepers of which the AAT is the largest with over 2,500 practitioners.

Even though selling desktop software licences to practicing accountants was lucrative at the time, it was never going to be game changing. Also, desktop licences had the disadvantage of not being upgraded by penny-pinching accountants. Therefore, a different strategy was needed by accounting software developers to expand and scale their business.

The market for accounting software
The mass marketing of desktop software to accountants in practice and industry elevated Sage Group plc to FTSE 100 status. However, revenues of £1.8 billion was only the tip of the iceberg when compared to the £59 billion contributed by the accountancy profession to the UK GDP in 2017. However, according to the CCAB, the 100 largest accounting firms including the 5,660 registered auditors accounted for £14.2 billion of this pie. This still left a sizable £40 billion of fee income earned by just over 180,000 practicing accountants to entice the cloud accounting software companies.

DIY Bookkeepers and Accountants
The number of DIY bookkeepers and accountants using cloud accounting software have exploded. Today, millions of non-accountants commit £20-£30 per month for a cloud accounting software licence. It is not unusual to see prime-time TV campaigns glamorizing the benefits of cloud accounting software with some adverts using successful entrepreneurs to sell their products.

Prior to the explosion of cloud accounting software, over 3 million small limited companies and self-employed businesses would spend between £500 – £1,500 with a practicing accountant to finalise their year-end accounts and tax returns. However, with the financial commitment of cloud accounting software eating into their budget, these businesses were forced to source cheap accounting services online and thereby disrupt the earnings potential of the traditional accounting practice.

Digital Accounting
Digital Accounting involves the integration of OCR data capture technology with cloud accounting software along with integration of year-end accounts and tax software to provide a truly digital working environment for bookkeepers and accountants.

Digital Accounting Framework

Cloud Accounting
The last decade has seen the growth of leading accounting software companies, such as Sage, Xero and QuickBooks moving from the traditional desktop products to online Software As A Service (SAAS) solutions or Cloud Accounting.

As with most disruptive technology, the accounting software companies has shifted their strategy from targeting a finite number of accounting practices to the mass market of small and medium-sized business owners. This strategy is commendable when one considers that there are over 3 million registered companies and many more self-employed and partnership businesses.

OCR Technology and Automated Data Capture
Optical Character Technology (OCR) has been adopted by many accountants both in practice and industry to reduce the tedium and expense of manual data entry. Initially, the OCR developers focused on large accounts payable departments where the efficient benefits were easy to justify.

More recently, the OCR developers have began to focus on developing applications to integrate data extraction tools with cloud accounting software products.

Accounting firms have become significant beneficiaries of OCR technology which has revolutionised the processing clients invoices and receipts. In a similar vein to cloud accounting software, OCR data capture product are based on the SaaS subscription model with licence fees costing between £100 to £500 per month.

OCR technology has placed the practicing accountant back in the driving seat by eliminating the cost of manual data entry for accounts payable and receivables.

Integration of open bank technology with cloud accounting
One technology that has contributed to the digitisation of the accounting practice is open banking. This allows real-time updates of client’s bank transactions into the cloud accounting system which removes the tedium of reconciling the accounts with bank statements.

Specialist Tax and Year-end Software
In addition to embracing OCR technology, practicing accountants have benefited from the arrival of specialist cloud based tax and year-end accounting software. Unlike the mass market appeal of cloud accounting software, year end accounts and taxation is the still the preserve of the practicing accountant.

Cloud accounting software companies are now keen to offer massive discounts to practicing accountants to resell software licences to their clients. The main reason for this shift back to the accountant is that business owners are waking up to the fact that running a business and trying to be a DIY accountant is a mugs game where the only winner is the cloud accounting software company.

The modern practicing accountant is now tooled up to reduce the bookkeeping and management reporting overhead of small businesses through OCR data capture, cloud accounting and seamlessly generation of their final accountants and tax requirements. More importantly, the accountant can deliver this end-to-end service to small businesses for less than £1,500 per client per annum. In turn, small businesses can shed the cost of part-time bookkeeping staff, cloud accounting software fees and the distraction of being a DIY accountant.

The future of the high street accounting practice
The high street accountant who hasn’t yet woken up to digital accounting is heading for a dangerous financial awakening. The modern digital accountant is mobile and exploits cloud storage to reduce occupancy costs. In order to survive and stay competitive in the future, the high street accounting firm needs to transform by embracing digital accounting technology.