How much accounting do you need to know?

I know a good amount of accounting when it comes down to it. I'm not really a CPA though. Do you need to know massive amounts of accounting detail to be an analyst at a hedge fund? Say for different types like L/S, arbitrage, distress, etc.

Seems like hedge funds are more strategy driven. Figured I would take a thought or two if anyone is in the field.

 
Best Response

No, I would say not.

I think most fundamental analysts have a good working knowledge, but CPA-level is overkill. You need to understand what's going on when looking at two companies that report LIFO vs. FIFO, be able to pick up when a company's allowance for doubtful accounts grows, and understand the impacts to all three statements when a large acquisition is made.

I met with a company recently that had a somewhat sizable acquisition and that company's main customer is slowing spending. I know that there's an annual test of Goodwill, so you could see a sizable write-down there. Does that matter? Not really... the write-down would impact GAAP EPS but it'll be ignored in Adjusted EPS. The big issue is the customer spend slowing, not the potential accounting impacts.

 

My PM has his CPA and he says it helps it out a lot as well. A deeper understanding of the 3 statements can only provide more value to your analysis. So do you need a CPA no, but that level of understanding can only help.

"When you expect things to happen - strangely enough - they do happen." - JP Morgan
 

UNDERSTANDING accounting is very important, but much of what the CPA teaches/emphasizes is more about rules and internal controls than understanding the actual IMPLICATION of what it means. That goes double for the work experience of most auditors. I'm reminded of the Big 4 partner was convicted for insider trading but got most of his calls wrong because he clearly didn't really understand what investors cared about.

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
 

Some accounting courses will help you much more than others. i don't see a lot of value in courses like: Managerial Accounting, Cost Accounting, Tax, Audit, or even intermediate accounting (and i took all those classes in college). Financial Accounting + Financial Statement Analysis will prepare you pretty well IMO. I don't think banks will care whether you have an accounting degree or not, but i think it's wise to take these courses for your own sake if you want a career in IBD / PE

 
SocratesIsMortal:

Understanding goodwill is probably important. I recently completed a goodwill impairment test for our Series C PE investors to see if there was any post-money valuation issues that needed to be reflected appropriately on our balance sheet.

We have discussions on stuff like this. Typically we'll figure it out, then run it by an accountant just to make sure we're right.

 

I think that in most PE topics, you have to be able to keep up with the experts. Whether it's a CPA, a COO, CFO, CTO, CMO, you need to keep pace with all of them, be able to isolate the stars and keep them on your squad. People you need to push and challenge but need to keep pace with. I'm a country mile from a CPA but I work real hard to keep up and I hire ace CFO's in operating companies. You can never have enough accounting!

Global buyer of highly distressed industrial companies. Pays Finder Fees Criteria = $50 - $500M revenues. Highly distressed industrial. Limited Reps and Warranties. Can close in 1-2 weeks.
 

I'm 99% sure every state requires you to have a BA/BS in Accounting to become a CPA...most states will also require more than just two classes in ACC, and so on. Why would you want to become a CPA if you are planning to just be a finance major? Doesnt make sense to me

 

I think the ER interviews focus more on your understanding about the market and how to pitch a stock. I have encountered some basic question about how financial statements link to each other. But nothing major in accounting. BTW, I am an accounting major if that makes any difference. I also know some ppl got asked about the typical if capital expenditure increase by x amounts, how would that affect the financial statements

 

A full major will look good on a resume if you double it with finance, but in terms of actual usefulness, it's not necessary. When people say you should take as much accounting as possible, they are referring to financial accounting courses. So the only ones that will really help you for banking are Intermediate Financial, Advanced Financial, and Financial Statement Analysis. I would recommend you continue on to Advanced (where you cover M&A, LBO, and restructuring accounting) and Financial Statement Analysis (a great complement to a valuation course). Taxation of entities may be beneficial in some cases, but I don't think it's worth the trouble at all. And Cost/Managerial Accounting, while useful for many consulting roles, is not important for banking. Auditing Principles, Ethics, and the rest of the major will be a waste of time unless you want CPA eligibility.

For "industry roles" in various companies, I'm assuming you're referring to financial management/corporate finance/internal finance roles. If this is the case, then a full major (CPA if you can) will be very valuable.

 

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