By Lim Ju May
Financial Accounting and the Medical Profession – What is the Connection?
Gong Xi Fa Cai, Prosperity, and Good Health to all. ‘Health is wealth’ is universal truth for everyone but would you agree that the same also applies to businesses? The financial health of a business is akin to a person’s health.
ACCOUNTING communicates with numbers – the financial health of a business. In this vein, Mr Henry Tan, Group CEO and Chief Innovation Officer of CLA Global TS spoke to members of Singapore Medical Society of the United Kingdom (SMSUK), that ACCOUNTING MATTERS to the medical profession and has an important role in determining the value of a medical practice and in setting its trajectory for growth. A medical professional must be able to understand accounting to be able to understand the financial health of his medical practice.
“As a medical examination monitors our four vital signs – body temperature, pulse rate, respiration rate and blood pressure; ACCOUNTING monitors businesses’ four vital signs – financial position, financial performance, returns on capital and cash flows,” said Mr Tan.
Mr Tan’s speech centred on four key themes:
- What has financial accounting got to do with the medical profession?
- Health of your medical business through the eyes of accounting
- Making sense of financial reporting to support your medical practice
- Practical accounting applications to deliver growth & future sustainability
Mr Tan said: “Medicine like any other profession is also a business. Should you aspire to hold management roles in hospitals or healthcare conglomerates, this will require you to understand accounting”.
To the question “What has financial accounting got to do with the medical profession?”, Mr Tan provided three compelling reasons –
- Business Language to communicate the financial health of your business.
- Monitors the vital signs of your business.
- Puts value on your medical practice.
Accounting Is The Language of Business
CNBC Excerpts: Billionaire Investor Warren Buffett on CNBC’s “Squawk Box” – BUFFETT ON ACCOUNTING said:
“Accounting is the language of business, and you have to be as comfortable with that as you are with your own native language to really evaluate businesses. And accounting tells you a lot and it can be used in many ways to deceive. You saw it in Enron, for example… But you really have to understand what can be done with accounting, when it gives you correct answers and when it gives you wrong answers”.
Warren Buffett is said to have coined the phrase “accounting is the language of business”. Additionally, he is known to have advised a 17-year-old investment intern to study the accounting language, explaining that it is the best way to learn how to read financial statements and is ultimately a main factor toward success in the business world.
Numbers like alphabets are universally understood. Alphabets put together under linguistic rules form words which makes a language. Numbers put together under accounting rules form accounting numbers which when put together makes up a set of financial statements.
“Accounting is the language of business and more. Healthy financial statements indicate a profitable practice, growth potential and attracts investors which in turn enables research, innovation, and growth,” said Mr Tan.
In addition to communicating the financial health of a business, financial data and key performance indicators can be harnessed internally to improve business insights and planning; detect fraud and misuse of funds; and for faster and right decision making.
Smart decisions in research and development cater for future business sustainability; capital expenditure (CapEx) investments facilitate long term growth; brand building generates intangibles; human capital investment enhances quality; and right pricing and costing increase profitability. Hence accounting when used efficaciously works as a lens into an organisation’s activities.
For business owners aspiring to go public, accounting plays a crucial role in generating the key inputs required in business valuation models. In short – accounting puts value to your business.
Complex Accounting Rules
Are accounting rules complex?
I would probably answer Yes for complex transactions and No for simple transactions. Complex transactions usually entail future projections, best estimates and inevitably the exercise of judgment with due consideration of all facts and circumstances. Singapore’s accounting standards, Financial Reporting Standards (International) (“SFRS(I)s”) achieved convergence with International Financial Reporting Standards (“IFRS”) in 2018. The text of IFRS Standards has over 1,500 pages.
The IFRS framework comprises a conceptual framework, 41 accounting standards and 20 IFRIC interpretations. Other supporting documents include 40 Basis for Conclusions on IFRS Standards, Agenda decisions and a practice statement on making materiality judgment.
Financial statements report an entity’s financial health through accounting numbers comprising various financial items under categories of asset, liability, equity, income and expenditures, making up the building blocks of financial statements.
A complete set of financial statements is prepared under a specified accounting framework (SFRS(I) in Singapore) and is made up of the following:
- Balance sheet
- Income statement
- Statement of changes in equity
- Cash flow statement
- Notes (accounting policy and explanations) and comparative information.
To understand the accounting language, one must first start with learning how each building block is shaped or formed before progressing to learning how to read financial statements.
As with any language, one must master the accounting rules to evaluate an entity’s business through its financial statement. Accounting rules comprise fundamental concepts such as accrual basis of accounting, materiality, going concern assumption and the various more complex rules stipulated within an accounting framework e.g., SFRS(I)s, IFRS and US GAAP.
Can ACCOUNTING do without Accountants?
Can medicine function without doctors?
Can law function without lawyers?
Can ACCOUNTING function without Accountants?
I have until this point discussed the subject of ACCOUNTING in isolation from the Accountant. Much has been said about the future relevance of Accountants in the age of digitalisation, blockchain and technology.
Proponents of the view that Accountants will be replaced by technology such as artificial intelligence and blockchain have failed to comprehend the rudimental need to uphold accountability, transparency, fairness, responsibility, and public interest to stakeholders within a stewardship eco-system corporate business environment.
Interestingly much of this malignment have sprouted from voices other than from within the accountancy fraternity, with no in-depth understanding of the complexities of ACCOUNTING, the Accountant’s Code of Ethic, the Directors’ fiduciary duties entrenched in the Companies Act and the need for public interest. Perhaps there is a secret need to compensate for an inability to master the complex accounting rules? Just a jest. Accountants can be funny too.
“FTX and Alameda Research didn’t have their own accounting department – and it’s impossible to rely on any of their financials, bankruptcy filing says”, says one headline news. This is a first time that “accounting department” has made headline news for reasons of its non-existence.
FTX’s new CEO John Ray III said in a filing with the U.S. Bankruptcy Court that “in his 40 years of legal and restructuring experience”, he had never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.” He disclosed that he did not have confidence in the accuracy of the balance sheets of FTX… and that part of his remit would be to implement controls and basic corporate standards such as accounting, audit, cash management, …. and other systems that did not exist, or did not exist to an appropriate degree, prior to his appointment.
The Sam Bankman-Fried’s bankrupt crypto exchange FTX saga brings to mind Buffett’s remark that “accounting tells you a lot and it can be used in many ways to deceive.”
The debate is concluded. The verdict is out.
ACCOUNTING cannot do without Accountants.
View the full article in PDF here.
Article by:
Lim Ju May is Technical Director, Assurance Principal, CLA Global TS.
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