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Accounting for everyone

Rodrigo Verdi teaches accounting, the ‘language of business’ — and studies the links between accounting and market movements.
Rodrigo Verdi
Rodrigo Verdi
Photo: Bryce Vickmark

Rodrigo Verdi is aware that accounting does not have the most — how to put it — alluring reputation. He senses, from the first time students walk into his accounting class, their anticipation that the subject will be dry and technical. So Verdi addresses this issue head-on.

“Accounting is the language of business,” Verdi, an associate professor at the MIT Sloan School of Management, tells his students. Moreover, he emphasizes, it is the basis of evaluating almost any aspect of a firm. “When I step in the classroom to teach the core accounting class to MBA students, I tell them, ‘I’m not training you to be an accountant. I’m training you because whatever you decide to do, accounting is going to be fundamental.’”

Consider MBA students who want to pursue marketing, finance or operations. “Accounting is not separated from these activities in a corporation,” Verdi says. “If you’re going to do marketing, you’ll need to understand the prices of goods, to see which you should market more or market less — you’re using accounting. When you’re in finance and you talk to investors about raising capital and investing strategies — you’re using accounting. In operations, you want to improve firm performance, minimize costs — you’re using accounting.”

Verdi’s own research probes the links between accounting practices and capital flows in global markets. He has published an extensive set of empirical papers along two lines of inquiry: The first studies how the accounting methods firms use correlate with the substantive strategies and risks they pursue. The second examines the effects of the International Financial Reporting Standards (IFRS), a uniform system of accounting methods, on patterns of global commerce.

“I don’t think accounting is a self-contained field,” Verdi says. “A lot of what I do is on the frontier between accounting and finance.”

From Porto Alegre to Cambridgeport

Verdi was born in Brasilia, the capital Brazil built from scratch around 1960 —  “I am from one of the first generations of people born in Brasilia,” he observes — but mostly grew up further south, in Porto Alegre, where his father was an economist. Verdi majored in civil engineering as an undergraduate at the Federal University of Rio Grande do Sul, in Porto Alegre, and says he retains an “engineering frame of mind” today.

Verdi also harbored an interest in finance, and — encouraged by his father — stayed at the university to pursue a master’s degree in finance and accounting while working in a bank. “I liked the switch to doing research, which I had not done,” he says.

Significantly, Verdi’s advisor also took a concerted interest in his work and suggested he apply to PhD programs in the United States. Verdi was admitted to the Wharton School, at the University of Pennsylvania, where he received his PhD in accounting in 2006. Emerging from Wharton, Verdi received a job offer from MIT, which he happily took; he received tenure from the Institute earlier this year.

Verdi has published a string of research papers during his time at MIT, such as one 2009 study, from the Journal of Accounting & Economics, that used 12 years of data and about 35,000 cases of annual corporate earnings to examine the relationship between high-quality accounting practices and investment efficiency. Verdi and two co-authors found that firms using higher-quality accounting methods make better decisions about how to invest their capital, in two ways: Those firms are both more likely to avoid bad investments and less likely to miss good investment opportunities.

Then there is the ongoing issue of whether all countries should adopt the IFRS system of uniform accounting methods. So far, more than 100 countries have done so — although some large ones, including the United States and Japan, have not. Here, much of Verdi’s research has explored the costs and benefits of IFRS.

“There is a lot of evidence it adds liquidity to markets — it attracts more foreign investors from countries that have also adopted,” Verdi says. The assurance provided by global standards, he explains, means “there is more flow of global capital. Firms with growth projects are able to tap into those [global] markets and increase the investments in themselves.”

Verdi notes that the overall impact of IFRS is still subject to more research and debate: “There seems to be a certain amount of benefit, but up to precisely what point? I don’t think we know that answer yet.”

Beneath the radar — sometimes

Large-scale accounting issues such as this typically go unrecognized by the general public and most of the media, Verdi notes — although members of the public who are active investors are much more likely to watch the field.

“It’s fair to say that accounting only gets into the larger public domain when things go badly, like the Enron type of case, when you have something more extreme,” Verdi says. “But on a day-to-day basis, the more nuanced changes are known by the investors following firms, and people in financial markets.”

And, perhaps, by many of the students who have passed through Verdi’s classes. In the classroom, Verdi employs a variety of devices to get students to see the value of accounting. Sometimes, he’ll have particular students pick out 10 newspaper articles on business at the beginning of the semester, and highlight the terms they do not know.

“At the end of the semester, you’re going to know 95 percent of those terms and read the articles much more confidently,” Verdi says.

Alternately, he’ll encourage students to read the financial statements of companies they like, at the beginning and then the end of a semester.

“At the start, you’re going to learn about the company, but by the end of the semester, you’re going to know 10 times more,” Verdi says. “You don’t have to do more with accounting down the road, but learn it now, and you’ll have an important tool.”

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