AI's final countdown for accountants

While some people got into a discussion about which AI is better suited for war or whether it should be allowed to access secret documents, there was another article stirring a discussion about AI.

The Financial Times published 'KPMG pressed its auditor to pass on AI cost savings' where it was revealed that KPMG, one of the Big Four accounting firms, convinced its own auditing firm Grant Thornton to lower its fees. And Grant Thornton did. The fees went from $416,000 down to $357,000. Nice 14% reduction.

What was the reason behind it?

Both firms were publicly discussing their use of AI and how AI will improve everything from quality to speed.

This created two camps on the Internet.

One side of the argument is that if something takes a shorter time to achieve the same outcome, you should also pay a lower price. The other side argues that if you are getting a higher quality final product, you should pay more for it, irrespective of how long it will take to make it happen. There was also an argument that if the firm invests in AI, it should be able to recover it with higher fees. But that only shows a complete misunderstanding of the issue.

Before you decide which side you are on, one should consider that a) accounting firms in most cases charge by the hour, b) audit is high volume, low margin, commodity product.

If you run a company and you need to get an audit done, you can ask a few accounting firms to bid on it. You compare the price and you go for the cheapest one. Why? Because at the end of the day, you will end up with an audit. A document whose structure is prescribed by the regulators and it is the accounting firm which signs off on the accuracy, assuming that they were provided with all the information that is. It ain't brain surgery. (I wonder how many of my accountant readers will unsubscribe after this comment. Couldn't resist.)

The introduction of AI - a new technology - into business highlights the fact that technology serves only as a differentiator for a short period of time and eventually gets adopted by everyone. Also, technology provides efficiency. That in turn brings to the forefront a structural problem which accounting firms have - or any other knowledge based organization.

The accounting business model depends on a stream of junior accountants coming to the firm, learning, progressing, buying into the partnership and eventually retiring. At one point, accounting firms started offloading part of the process to countries with lower costs. At the beginning, it was a differentiator. When everyone does it, it makes no difference. But actually it does. It removes the opportunity for the junior accountants to learn. Yes, the learning means countless, tedious hours in front of a computer. That will become handy later in your career when you can spot a mistake from miles away.

Now that firms are introducing AI into the mix, accountants will rely on the technology even more. For the 'old dogs' it will create efficiencies and speed up things. For everyone else, it will prevent them from learning. Now, the challenge is that if the partner at the accounting firm charging $500/hour finishes the task in half the time because of technological efficiency, should the invoice be the same, half price, or double?

And this is the structural problem you get when you charge hourly rates for your service. This is the challenge which all the knowledge based companies are facing. How do you assign value to your work? Your customer doesn't care how many hours your firm spent on the project. How many people and how much AI was used.

In my opinion, arguing whether the fee should go up or down is pointless. One should ask 'What is the value we deliver with our product and does that align with the view of our customers?' Because if not, you have a bigger problem to solve.

One thing KPMG and Grant Thornton achieved with this discount was to put front and center the question of the value they deliver to their clients.

The recurrent pattern? Part of your strategy has to be a clear definition of the value you provide to your customers. Absent of that, you start lowering your fees.