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.

Comments (41)

Aug 18, 2014

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.

Aug 19, 2014

Awesome. Interesting to hear. I wonder because it seems like most funds are strategy and skill driven with research and market analysis being a big part.

Aug 19, 2014

One of my Professors has a CPA/CFA/top tier MBA. He's head of fundamental research at a HF and says the CPA helps a lot. Not sure if that applies to most other funds though.

Competition is a sin.

-John D. Rockefeller

Aug 19, 2014

A CPA level of accounting expertise would be overkill. That being said, the more familiar you are with accounting, the better.

If you are shorting individual stocks a very strong accounting background is particularly helpful. Especially if your short book is intended to generate alpha and not just hedge your longs.

Aug 20, 2014

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.

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Aug 24, 2014

I would say that your general analysis skills will help you identify good investments, but the accoutning knwoeldge can help you avoid a few land mines, so id say def vaue in having it.

Aug 24, 2014

I fall into the camp of people who believe that you can't have enough accounting understanding when it comes to bottom-up equity investing. Unfortunately, yet to reach that level of understanding.

Aug 25, 2014

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.

Aug 25, 2014

1 class will not give you the background you need to know working in finance.

I didn't say it was your fault, I said I was blaming you.

    • 1
Aug 25, 2014
Neighbor:

1 class will not give you the background you need to know working in finance.

so, management accounting I and Introduction to Financial Accounting is not enough right?
(major in economics and finance)

Aug 25, 2014

Generally training prepares you pretty well in terms of accounting.

Aug 25, 2014

Thanks, wallstasks, then what are areas that training doesn't do a good job preparing?

Aug 25, 2014

You mean one class as in "Intro to Accounting"? No, definitely not. You will - at the bare minimum - need one or more classes that go through accounting standards in detail (revenue recognition, impairments, inventory, essentials of accounting for financial instruments etc.pp.).

Aug 25, 2014

Most of the technical questions I was asked in interviews were pure financial accounting questions.

Take as many courses in it as you can.....

Aug 25, 2014

thanks guys for the help

Aug 25, 2014

Take as much as you can. It's funny you posted this topic, today a few of the guys where I'm interning were trying to figure out accounting stuff that I knew from one course, even my MD was on the phone with tax people later in the day albeit for more complex items. It def. helps to have a few courses under your belt though

Aug 25, 2014

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

Aug 25, 2014

You'll only need a financial accounting course. It isn't so much about accounting as it is financial statement analysis. An accounting degree is over kill in my opinion. Look at it this way: tons of liberal arts majors enter investment banking analyst programs every year.

Aug 25, 2014

Bump

Aug 25, 2014

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.

Aug 25, 2014
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.

Aug 25, 2014

Just be able to intricately link the 3 statements

Aug 25, 2014

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!

Aug 25, 2014

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

Aug 25, 2014

i dont think its true of every state, but New York yes. A BS/BA in Accounting isnt necessary for CPA in europe. You just take an extra set of exams starting out

Aug 25, 2014

In case I ever want to do corporate finance...is a CPA needed for that?

Aug 25, 2014
zoov:

In case I ever want to do corporate finance...is a CPA needed for that?

No

If I had asked people what they wanted, they would have said faster horses - Henry Ford

Aug 25, 2014

Okay, disregarding the CPA now, what would you say is the most accounting anyone in area of finance would ever need?

Aug 25, 2014

*Bump... Anyone?

Aug 25, 2014

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

Aug 25, 2014

More accounting never hurt anyone. Stuff like cost acctg won't help, but any financial statement analysis classes are very helpful. Depending upon what your school offers, would take an M&A accounting class and a tax accounting class also. Also don't forget the key finance classes: Valuation, LBO/M&A, fixed income/derivatives

Aug 25, 2014

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.

Aug 25, 2014