Accounting Automation (#236)
/The topic of this episode is accounting automation - what traditional accounting processes are currently being automated, what might be coming in the future, and how to prepare accountants for this future state. Key points made are noted below.
The Underlying Accounting Process
The underlying structure of how accounting is conducted hasn’t changed at all in a long time. There’s a basic process flow that’s followed every time, everywhere. So when we talk about automation, what we’re really doing is using a technology tool to accelerate a small piece of the entire process – but the process itself doesn’t change.
Payroll Automation
For example, let’s look at payroll. This is the area that’s been automated the most. The basic underlying process flow for timekeeping is that someone writes their hours worked on a time card, which is submitted to accounting, which converts the time card information into a total number of regular and overtime work hours, which are then multiplied by pay rates to arrive at a gross pay figure.
Now let’s look at the technology that’s been added to this one small area. We now have timesheet apps on smartphones, and on websites, that can route this information into the payroll database without any need for data entry. We also have computerized time clocks that do the same thing, as well as biometric time clocks. So, the underlying process is still there, but tools are now available that strip out the related work.
Inventory Automation
And there’re so many more tools that have been added over the years. We bar code inventory in order to scan it into the system. We have remote deposit capture to scan incoming checks into our bank accounts. The payroll and payables departments use electronic payments. Suppliers send electronic invoices. And the accounting system can automate the three-way matching process for us.
Now, speaking of three-way matching. That’s the bit where someone in the payables department compares a supplier invoice to the authorizing purchase order and receiving documentation to see if the supplier can be paid. It’s a control point. This is one of those rare cases where the underlying process can be altered to make the payables process more efficient. One way is to have the receiving staff approve received goods for payment at the receiving dock by checking off the received items against a list of open purchase orders in the warehouse’s computer system. Better yet, suppliers can deliver goods straight to the production line, and they’re paid based on the number of finished goods that came out of the production line. But this is a rare exception. And in both cases, those ideas were formulated about a quarter of a century ago. Which is to say that accounting process improvements are very, very rare.
Highest Levels of Accounting Automation
Now, in regard to which accounting processes are being automated. The most obvious one is payroll. There have been some advances in billings, payables, and cash collections. It’s possible for the accounting system to compile less-complex invoices for customers without any manual intervention. The same goes for payables, where suppliers can enter their own invoices through a portal, and the accounting system schedules the payments from there. And in cash collections, there’re fairly accurate systems that can automatically apply cash to unpaid customer invoices.
Problems with Accounting Automation
But that still leaves a lot of areas that involve mostly manual labor, such as liabilities, fixed assets, equity, collections, taxes, and inventory – especially inventory. These are all areas of opportunity if someone can figure out some new automation. But I don’t think it’s coming any time soon. And I have two reasons for thinking that way.
One is that a jump in innovation tends to coincide with a major new technology platform. So, we had a slew of new innovations when smartphones appeared, like having phone-based timekeeping and credit card processing and billings. That platform appears to be pretty much maxed out, so I’d be surprised if we see any more innovations from that platform.
My other reason is that, looking back on when innovations were first introduced, the rate of advancement is actually pretty slow. The first bar code scanner was produced in 1974. The first computerized time clock? 1988. Remote deposit capture? 2003. So in short, even though it seems like there are lots of automation tools, they’ve crept up on us over a fairly long period of time. Which means that it may be a long time before anything else appears.
Prospects for Future Automation
As for the question of what is coming in the future – it’s really difficult to say. After all, who could have predicted bar codes? It’s an inherently odd concept that happens to work really well. So no, I cannot tell. I can say that the areas most in need of innovation are where there’s a high level of transaction volume and a lot of labor, which points toward collections and inventory. If someone comes up with a great innovation in one of these areas, the potential cost savings would be so large that the adoption rate should be fast. And given the potential for rapid adoption, this is where inventors are most likely to be concentrating their attention.
The really good question is how to prepare for the future. Clearly, we can’t tell which innovations will appear, or when. But we can assume that whatever appears will need to be properly inserted into the existing processes. So. What I suggest is to pay attention in your accounting information systems class. That means having a complete understanding of exactly how and why accounting systems work, and why we have controls at certain points. Then, get involved in all systems integration projects in the company, to gain experience in how the projects are set up and managed. For example, if the company wants to install bar coded tracking of inventory, learn about the types of bar codes, where the labels are placed on products for readability, where to position scanners, what to do when the systems fail, what kind of training to schedule for users, how controls are altered, how to write the procedures for the revised system. How to test the system. There’s a lot to understand. If you keep volunteering for these projects, you’ll not only be indispensable, but you’ll also be much more marketable than the average accountant. And if any nifty new technology comes along, you’ll be in a great position to install it.
One final thought. New technology might be rare, but there are all kinds of other events in the life of a business that will call for changes to the accounting system. For example, management might decide to add a warehouse, in which case you’ll need to add accounting systems over there. Or there may be an acquisition, in which the systems of the acquiree need to be integrated with those of your company. Or the company decides to outsource its manufacturing, in which case there’ll be systems changes to link up with the new supplier. These types of changes are vastly more likely than entirely new forms of technology, so this is the area for which you need to prepare yourself.