Accounting for Quants

[Ken Abbott]

I have a question for practitioners:

How much accounting do you feel you need to know to be effective? Clearly an understanding of VAs is requires, as is some knowledge of FV principles?

I sense there's a gap here andI'd like to see it addressed.

 

[Wdurrett]

Honestly not sure about quantity - but if your looking for some good / free classes check out UW's intro to accounting on coursera. I took a few classes there when I was originally in corporate credit check and enjoyed it there!

 

[Wdurrett]

BTW - are you related to the political scientist, Ken Abbot?

 

[Ken Abbott]

BTW - are you related to the political scientist, Ken Abbot?

Nope. No relation.

I want to help a friend design a class that will teach quants the accounting they need to know in Finance.

 

[MarekB]

Ken, you raised interesting case here. Quant with good understanding around the accounting topics might be a very valuable asset on the labor market. After all, he/she design models which then need to be verified if they are in line with regulations.

I think that IAS39 is a very good start. As well as IFRS13 might be helpful. Among others, you will be able to find information what is needed to determine fair value of the financial instruments (including derivatives), how to deal with embedded instruments (price them jointly or separately), when to price fixed income instruments using effective interest rate and more. Such papers are written by lawyers, so the language is a bit unclear for person without such background, but in the internet there are a lot of pdfs signed by consulting companies like B4 giving useful, needed information regarding the topic.

I believe that Coursea would be perfect tool to clarify any issues and complete the needed knowledge.


Best regards,

Marek

 

[Amanda Rong]

Hi Ken Abbott and MarekB,

I've heard practitioners in risk management talking about the importance of accounting. Could you shed more light on how's accounting related to risk management? And do you have some recommended readings on that? How deep should quants dig into the documentations and accounting standards?

Thank you,
Amanda

 

[bigbadwolf]

I want to help a friend design a class that will teach quants the accounting they need to know in Finance.

The best I've found over the years is an appendix in a book by Horngren on management accounting that tersely reviewed financial accounting ideas and principles. The problem is that financial accounting texts are like calc texts -- way too voluminous, can't see the wood for the trees, and written for people with IQs 20 or 30 points less than the average quant.

 

[Ken Abbott]

Hi Ken Abbott and MarekB,

I've heard practitioners in risk management talking about the importance of accounting. Could you shed more light on how's accounting related to risk management? And do you have some recommended readings on that? How deep should quants dig into the documentations and accounting standards?

Thank you,
Amanda

Amanda, without some ancillary skill, quants are largely undifferentiated (save, of course, for the usual PDE vs econometrician distinction). With some accounting, a quant could move to the price review function or the audit function easily. Accounting is a core skill in finance. Even a little makes a big difference, especially lately given the extent to which the Basel capital calculations are used in financial statements.

 

[Ken Abbott]

Interesting editorial in the NYT today about accounting.

http://nyti.ms/QNrecY

 

[Tom Maloney]

Any agent (bank, hedge fund, mutual fund, etc.) in the market needs to keep track of their liabilities to other agents in the market (and vice versa). Accounting / reconciliation is largely operational but getting the numbers right is important for knowing your counter-party risk. When your counter-party goes bankrupt, your models don't mean that much anymore.

 

[CasanovaJ]

I've had a fair amount of exposure to accounting (undergraduate business degree + CFA), and in my ~4 years as a risk quant, I've used none of it... The closest I ever came was needing to understand was "FAS133 hedge accounting" was for derivatives monitoring (which wasn't even something I'd ever learned before) so I called up a friend in the accounting department, he explained it to me in under a minute, and that was it. I wouldn't say that it's "unimportant" per se, but if you're looking for a good way to "stand out," I'd at least personally say that accounting knowledge probably ain't it.