How AI Will Transform Accounting: A $100B Opportunity Explained

The discussion highlights the transformative potential of AI in the accounting industry, a field traditionally reliant on outdated software and facing a significant workforce decline as 75% of CPAs approach retirement. Despite increasing demand for accounting services, the supply of new professionals lags, creating pressure on firms to adapt. AI offers solutions by automating repetitive tasks, enhancing efficiency, and potentially reducing costs. However, challenges such as accuracy requirements and the billable hours business model pose hurdles. The conversation emphasizes the need for firms to embrace AI to maintain service quality and meet evolving market demands.

• The software used in accounting is outdated, reminiscent of the Reagan Era, despite increasing consumer and business demand for accounting professionals.
• The workload for accountants is increasing, while the number of hired and retained staff remains flat or declines.
• Automation and software improvements could lead to cheaper prices, faster service, and better consumer experiences.
• A significant portion of CPAs, around 75%, are set to retire in the next decade, with new CPA graduates not matching the retiring numbers.
• From 2019 to 2022, there was a 16% drop in the number of accountants, indicating a decline in the profession.
• The complexity of tax and accounting work has increased, leading to higher consumer and business demand.
• The accounting market remains large, with approximately 1.5 million accountants and auditors, expanding to over three million individuals in related positions, contributing to a significant economic impact.

"Accounting is one of the areas where the software that's being used is like Reagan Era software."

• The accounting industry is reliant on outdated software, which can hinder efficiency and service quality.

"The consumer and business demand for these professionals is increasing, your overall workload is remaining the same or increasing, but your number of staff that are hired and retained to perform that work is either remaining flat or declining."

• Despite growing demand, the workforce in accounting is not expanding, leading to increased pressure on existing professionals.

"75% of CPAs are set to retire in the next decade, and the new rate of CPA graduates is not nowhere near going to match that."

• There is a looming shortage of CPAs due to retirements, with insufficient new graduates to fill the gap.

"Somewhere around 16% of the number of accountants had dropped between 2019 to 2022."

• The accounting profession has experienced a notable decline in numbers over recent years.

• The accounting field is experiencing two major market trends: declining interest in accounting careers and increasing complexity of work.
• Despite the decline in professionals, the accounting market remains vast, with significant spending on wages.
• Accounting involves a lot of repetitive manual work, creating opportunities for disruption and automation.
• The pressure on accountants to maintain service levels is increasing due to the imbalance between workload and staffing.

"There is this decline in the number of people who want to become accountants, or generally be in the accounting field."

• Fewer individuals are pursuing careers in accounting, contributing to workforce shortages.

"The amount of accounting work and the complexity of tax has only increased over time."

• The work required in accounting is becoming more complex, demanding more from professionals.

"It's still a huge, huge market, and that's a lot of hours of work that need to get done also one way or another."

• Despite challenges, the accounting industry remains a significant economic sector with substantial workloads.

• Accounting is a professional service business that relies heavily on client service.
• The increasing workload and declining workforce make it challenging for accountants to maintain service quality.
• The necessity of taxes ensures that accounting services are in constant demand, affecting everyone.

"At the end of the day, it's a professional service business, and it relies upon client service."

• Client service is central to the accounting profession, emphasizing the importance of maintaining quality despite challenges.

"Everyone's got to pay their taxes."

• The universal need for tax services ensures ongoing demand for accounting professionals.

• Accounting is identified as a promising field for AI automation due to its repetitive tasks and the high salaries of professionals involved, making it ripe for cost-saving automation.
• Unlike law, which is text-based and more easily adapted to current AI capabilities, accounting is heavily quantitative, posing unique challenges for AI integration.
• The lack of a standout AI company in accounting, compared to legal AI firms like Harvey, suggests potential market opportunities or challenges specific to accounting.

"We generally look at Professional Services verticals that are ripe for AI under the lens of okay where are there a lot of highly paid people who are doing in many cases repetitive work that probably could benefit from smarter automation."

• This quote highlights the criteria for selecting industries for AI application, emphasizing the suitability of accounting due to repetitive tasks.

"Accounting on the other hand as we all know is extremely quantitative in nature, you're dealing with numbers all the time."

• This statement underscores the quantitative nature of accounting, which presents specific challenges for AI that are different from text-based fields like law.

• The concept of "why now" is crucial in evaluating investment opportunities in AI for accounting, focusing on current market conditions and demographic trends.
• The urgency to fill labor gaps due to retirements and insufficient new talent is driving the push for AI solutions in accounting.
• There is significant interest from top firms in investing in AI, with some willing to spend substantial amounts on developing or acquiring software solutions.

"When we examine markets and look for investment opportunities we often start with something we call a why now which is, simply put, why is now the right time to invest in this category."

• This quote explains the strategic approach to timing in investment, emphasizing the importance of current market conditions.

"These firms from the very top down are feeling tremendous pressure to fill these gaps not just with additional humans but really with software."

• This highlights the pressure on firms to adopt technological solutions due to labor shortages, indicating a shift towards AI.

• Industry feedback on AI in accounting shows agreement on the need for efficiency and employee satisfaction, with a shift from task execution to task review.
• Significant investment interest indicates recognition of AI's importance in the future direction of the accounting industry.
• High stakes and low tolerance for errors in accounting pose challenges for implementing AI solutions effectively.

"We heard that they were in resounding agreement, I think, of a lot of the themes that we pulled out. They're feeling the pressure internally, they want their firms to be more efficient, they want their people to be happier."

• This feedback reflects industry consensus on the pressures and desires driving AI adoption in accounting.

"One of the themes, actually one of the firms we talked to, it's a top 20 firm, they were ready to spend up to $500 million either building or acquiring software."

• This demonstrates the significant financial commitment some firms are willing to make to integrate AI into their operations.

• The implementation of AI in accounting is challenged by the high stakes of the work, which requires precision and has little room for error.
• The transition from traditional methods to AI-driven processes involves overcoming both technical and cultural barriers within firms.
• Ensuring AI solutions are reliable and meet the rigorous demands of accounting work is a critical hurdle.

"Look, I think it's like very high stakes work that has very limited tolerance."

• This quote illustrates the critical nature of accounting work, which demands high accuracy and poses challenges for AI integration.

• The accounting field demands 100% accuracy in outputs, contrasting with creative fields where AI's hallucinations might be more acceptable.
• Firms are cautious in adopting AI technologies to ensure they maintain their gold standard of accuracy.
• The rollout of AI solutions in accounting is conservative to avoid compromising the precision required in financial documentation.

"The contents of your tax return and your financial statement audits just have to be 100% accurate."

• The quote emphasizes the critical need for precision in accounting tasks, highlighting why firms are cautious about AI adoption.

• The traditional business model in accounting is based on billable hours, which can conflict with the efficiency AI offers.
• AI software could reduce the time needed to perform tasks, potentially decreasing billable hours and revenue in the short term.
• The market is expected to shift towards fixed-fee engagements due to competitive pressures.

"If you're coming in and you're trying to sell software to someone that the end result of which is that they can perform their job in 20% of the time it used to take them, if they're being intellectually honest with their customers then that should in theory reduce their billable hours quite a bit."

• This quote highlights the potential conflict between AI efficiency and the traditional billing model in accounting.

• The target buyer for AI software in accounting significantly influences the sales strategy.
• Individual contributors might resist AI adoption due to fears of obsolescence.
• Selling to firm leadership, who can see the clear ROI, might be more successful.

"If you're trying to sell this AI software to like an individual contributor, they might be a little bit skeptical... whereas if you're selling it to their boss or their boss's boss or their firm leadership or something and they see like the clear ROI opportunity in the business, you know, maybe it's an easier sell."

• This quote explains the different perspectives within a firm on AI adoption and the importance of targeting decision-makers.

• LLMs excel at data collection, ingestion, and making sense of unstructured data, making them valuable in accounting.
• They can efficiently translate various client-provided documents into journal entries and accounting reports.
• LLMs are also effective in research, providing robust opinions and citations for accounting practices.

"If you stop to think about what LLMs are really good at, data collection and ingestion would be like the canonical example."

• The quote underscores LLMs' strengths in handling unstructured data, a critical task in accounting.

"LLMs again excel at text in text out so if you're a practitioner and you want an opinion on how you should treat a certain transaction or you want to look something up in generally accepted accounting principles... using LLM to do that you can get a really robust opinion."

• This quote highlights the research capabilities of LLMs, offering detailed insights and citations for accounting queries.

• The accounting industry is experiencing a shift towards using AI to rebuild tax engines and provide client advisory services.
• Historically, accounting software was distributed through accounting firms, which helped in product dissemination.
• New software companies can now build large businesses by directly selling to accounting firms without needing a large team of accountants.

"We're starting to see some Founders kind of coalesce around rebuilding the tax engine using AI."

• Founders are recognizing the potential of AI to transform traditional tax engines, indicating a significant shift in accounting practices.

"Most companies that had success in the accounting ecosystem really sold through accounting firms."

• The traditional model of accounting software distribution relied heavily on partnerships with accounting firms, showcasing the importance of these relationships in past successes.

"Now we're at a point where LLMs can do a lot of that work without needing to hire an entire room of accountants."

• Advances in language models (LLMs) are reducing the need for large teams of accountants, lowering costs and increasing efficiency in software development.

• Accounting has a long history, with technology traditionally lagging behind other sectors.
• Many accounting systems still rely on outdated software from the Reagan era, highlighting the need for modernization.
• Despite minimal improvements, there's a growing opportunity for significant advancements in both consumer and professional accounting software.

"Accounting is one of the areas where the software that's being used is like Reagan Era developed software."

• The reliance on outdated software underscores the potential for innovation and modernization within the accounting industry.

"The software really hasn't gotten better both on the consumer or the end user side and for the accounting professional."

• The stagnation in software development affects both consumers and professionals, limiting efficiency and effectiveness.

• The integration of AI in accounting software can reduce manual tasks, ultimately leading to cost savings for consumers.
• By automating routine tasks, accountants can focus on more valuable services, enhancing consumer experiences.
• The shift towards AI-driven accounting solutions promises faster services and more competitive pricing.

"We as consumers should all be excited about this because...you're paying for that in some capacity."

• Consumers indirectly bear the costs of manual accounting processes, making automation a potential source of savings.

"If software could take away a lot of that manual stuff and allow them to get to the good stuff, that should ultimately reflect in cheaper prices in Faster service."

• Automating routine tasks could lead to lower prices and quicker services, benefiting both consumers and professionals.