August 23, 2019
The Internet of Things (IoT) can create a radical new type of double-entry bookkeeping – money one side, reality the other – where real-time financial information can be matched to real-time operational information
By getting right down into the nuts and bolts of the business, accountants can tackle the cause of almost 90% of all company fraud: asset misappropriation. This is what IoT will do: enable the accounts team to reach all the way down to the core of the business operations, touching the coalface directly. Best part? It’s all done virtually.
We are on the cusp of someone inventing a new type of accounting: money-reality accounting.
Wait, what?
Accounting is going to change. The people that engage in it will need to change … and the tools they use will change.
Five hundred years of double-entry bookkeeping
The practice of keeping tabs on what comes into and out of our stores goes back a long way. Clay tokens from 4,000 BC, showing itemised tables of numbers and graphic representations of stocks, have been found in what is now Iran.
Modern accounting traces its history to 1494, when Luca Pacioi published a 27-page treatise called Particularis de Computis et Scripturis – ‘Details of Calculation and Recording’ – in a book of mathematics.
Not too many people noticed, as 1494 was a busy year in Europe: Spain and Portugal signed the Treaty of Tordesillas, splitting the ‘New World’ between them, Christopher Columbus discovered Jamaica, and we have the world’s first record of a whiskey delivery. But the impact of double-entry bookkeeping was massive: five hundred years later, this is how we know whether our business is coming out ahead or we’re on our way to losing our shirts.
Double-entry – credits subtracted from debits to give a ‘bottom line’ – was the start of the abstraction of accounting. Instead of a list of things we had, accounting became about financial metrics. What was coming in and going out was still in there – but there was now also a profusion of other numbers, like cash on hand, creditors book and fixed asset value (and whether it could be leveraged for credit).
Things started getting even more complicated in the 19th century. Trade was globalising and the limited liability company was becoming a common commercial construct. Both shareholders and management needed to know what was happening in increasingly complex business. What was the value of depreciating assets, when and where was revenue being booked? Tax codes got exponentially more complex, and cross-border trade required accountants with brains the size of whole planets to keep track of it all.
Five hundred years to get further and further from the real business
But all this spiralling complexity means accounting teams have lost touch with the core of their job: keeping track of the state of the business. The language of accounting became more abstract and systems more complex alongside. Why, with all the computerised accounting tools we have, do the financial scandals that destroy untold business value take years to pick up? How have our financial controllers become so out of touch with what is happening right in front of them that criminal or incompetent business leaders can plunder a business with impunity?
Because accountants track financial records, but these are increasingly distanced from the business. Money is only a proxy for business activity – and there are a myriad ways to make the numbers lie.
So, how do we keep the financial numbers honest so that accountants can keep the business honest?
By putting accounting back in touch with the nuts, bolts and coalfaces. Accountants can become the superheroes in managing a business through the power of modern IoT technology.
IoT – the Internet of Things. A mundane term for an incredibly powerful weapon in the war against waste, lack of transparency and criminality.
Back in then-Mesopotamia, those ancient clay tablets show records of physical stocks in a store. They show who paid what money. Now, powerful accounting software lets you do complex allocations of budgets, revenues, cost and asset depreciation – but these are just more numbers on a screen. Like statistics, what they reveal is suggestive, what they may conceal is vital.
The enormous time chasm between operational data and accounting data
Nowadays, business happens too fast and accounting teams sit too far away from operations to know whether the numbers they work with are matched by what is on the shelf, driving into the receiving bay, or being sprayed on the ground. There have been some incremental movements in how accounting should map more closely to the real world – for example Activity Based Accounting tries to put a value to overhead activities … time spent by people in setups required to deliver product, but that incur costs.
Numbers do lie – if you let them
This is the very real problem today: accounting systems work only on a distant proxy (money) for what actually needs to be controlled in the business (inventory, costs, value delivery…).
What’s the solution? Visibility. Real-time, real-world visibility.
This is where IoT comes in. The Internet of Things is not a new concept: people have been hooking up sensor devices to networks for decades. But modern tech allows this to be done very cheaply, very conveniently and very pervasively.
You can stick a sensor on all loading-bay lifts to instantly confirm the number of kilogrammes of pickles that have been unloaded against the number of 24-jar cases of 500g pickles entered into stock. You can put a door sensor in every cold-room to see if it’s being kept closed.
With great visibility comes great power. Accounting must claim it
Operational data can now be easily exposed in real-time computer systems through IOT systems. Operations managers can see at a glance, at any moment, what’s going on in their world. Accounting departments must now see this same information to be confident in their numbers.
So, now comes the challenge. The concept of gaining real-time business visibility through IoT is easy. Turning it into everyday tools and Generally Accepted Accounting Practices is the challenge someone needs to pick up. And this will not be easy – the only thing worse than not enough information is too much information. The developers of accounting and enterprise resource planning systems have to turn data into visibility, not a confusing fog of data points.
Who will lead this transformation? Who will be the next Luca Pacioli, inventing a system of accounting that is not just double-ledger credits and debits, but double-reality – financial and operating reality – where you can match what is supposed to be happening in the business against what’s happening in real life.
The hard truth is that todays accounting systems – that should be the number one tool in picking up dodgy dealings – work only 5% of the time. This should be horrifying news for accountants: most fraud is not picked up by their systems.
The Association of Certified Fraud Examiners reported in its 2018 Report to the Nations that 40% of fraud cases reported were the result of someone reporting something suspect. Internal audits caught only 15%, management reviews 13%, lucky accident 7%. Only 5% of fraud was detected by account reconciliation.
And while we all hear about the massive corporate scandals that make front-page news, it’s small and medium enterprises that are hardest hit – fraud costs SMEs twice as much as corporates. According to a front page story in Professional Accountant, the publication of the SA Institute of Professional Accountants, a number on priority is rebuilding trust in the accounting profession.
It’s time for accounting professionals to step up, understand the technology of the Internet of Things, and apply it to accounting. They could become world leaders in the New Accounting: “money-reality accounting“.
