Saturday, April 1, 2017

Cafe X and Amazon Go: Auditing a robot-operated store?

By now you've probably heard of the robot-barista - Cafe X.  If not check out this video from Wired, where David Pierce walks us not only through how the robot will make your latte, but why he thinks it better than the human alternative:

Amazing isn't it?

In a presentation I did last year on how these forces of automation could impact auditing & accounting, I noted it's easier to see how technology disrupts someone other than you.

And so it looks like baristas have met their match.

As Pierce notes in the video, the inconvenience of dealing with imperfect people is something that most people want to avoid in the rat-race we live in: who wants the barista to remake your coffee 11 times as he says? ;) 

The Wired article also notes that Cafe X is 'high-quality at a cheaper price': 

"Surprisingly delicious coffee, starting at $2.25—cheaper than you’d find at Sightglass or even Starbucks. Cafe X’s location in the corner of the Metreon may not entice you out of your daily routine."

Amazon Go: Walkthrough Technology 
Amazon has also wowed the "techthusiasts" out there with their cashier-less store concept:

In the FAQ section, Amazon summarizes how this cashier-less store works:

"Our checkout-free shopping experience is made possible by the same types of technologies used in self-driving cars: computer vision, sensor fusion, and deep learning. Our Just Walk Out Technology automatically detects when products are taken from or returned to the shelves and keeps track of them in a virtual cart. When you’re done shopping, you can just leave the store. Shortly after, we’ll charge your Amazon account and send you a receipt."

Although this has the potential to revolutionize retail, Amazon has experienced some setbacks of late. The store can allegedly only handle 20 people at a time. So there maybe some kinks to work out before this goes mainstream.

Obviously, this could have a massive impact on entry level jobs: most of us who were young a while ago relied on these McJobs for spending money and funding our college/university tuition. They also gave students some practical work experience to help land a career accounting profession ;)

But let's save this discussion for a future post.

How would you audit cashier-less stores, like Cafe X or Amazon Go?

The retail industry has been a manual intensive industry that requires cashiers, stock room personnel and the like. Such a process naturally requires policies and procedures (aka internal controls) that ensure that merchandise makes it from the shelf to the cash register and into the customers possession. And there are those anti-theft mechanisms to prevent shoplifting as well. In the industry, "shrinkage", the amount of merchandise that is stolen, robbed, damaged, etc, is estimated by the National Retail Federation to be 1.38% of sales or $45.2 billion for 2015.

Cafe X and Amazon Go offer a glimpse into how automating traditional businesses can alter these fundamental risks that impact the way we go about conducting our financial audits.

With Cafe X, shrinkage is almost eliminated as there is no humans involved in the production process. Once the kiosk is loaded up with cups, coffee, syrup, sugar, milk, etc. the system is essentially fully automated - no manual intervention by baristas or customers.

Amazon Go, on the other hand, uses a whole lot of automation that is watching and analyze every move of the customers (and employees) throughout the store. Consequently, this would not be the store to steal from! And let's not forget Amazon is experimenting with those drones and are we really sure that they are unarmed?

Given this level of automation of the actual business process and controls, could auditors stick to the tried, tested and true retail audit procedures? Or would this enable a more automated approach?

I was directly involved with the recent test-audit of the blockchain involving loyalty points. One of the realities of auditing such exponential technologies is that it makes controls testing a must. For example, for the financial auditor to rely on the digital signatures there needs to be some testing around the wallets to ensure that the signatures are reliable.

Consequently, testing such automated stores would require either a SOC2 or modified SOC report to meet the needs of such a store. For example, the SOC2 would need to have some way of having comfort of how the stock and inventory gets loaded into the store. Likely the auditor would rely on the automated process which the store uses to replenish stock, but it's that hand off between the delivery person (assuming it's still human) that would be the area there is a risk of shrinkage. For example, how does legitimately damaged inventory get accounted for at that point? Whatever process and controls Amazon/Cafe X put in place would need to be tested from a controls perspective.

For the substantive component, I think that's where things get interesting: enter the "embedded audit module". This concept has been around since at least 1989. The idea is that the auditor installs independent software onto the client's system and then transmits it back to the auditor, who uses it as a basis for conducting the necessary audit procedures and tests. The core idea is that the auditor has full control over such a system and the client cannot tamper with the code.

What would be relatively straightforward would be the data capture-component: sales data, stock data, spoilage, etc. would be uploaded from the automated store right into the auditor's system. But this then requires the additional step of verifying the data to independent source documents (e.g. invoices, purchase orders, etc.). In other words, the audit procedure would still require manual intervention as the auditee would need to send this information back to the auditor to complete their audit.

Where I think the audit innovation would be is exploring how video footage can act as a substitute for physical/direct observation by the auditor. That is, could the auditor install a video camera in the automated store as a part of the EAM that would then act as actual independent audit evidence of the actual sale or purchase? For example, in the Cafe X example the auditor could actually use the footage and the visual software to count the cups sold that day and reconcile that to the sales data transmitted back from the EAM for the day?

Although one can argue such transactions are not material and therefore such procedures are overkill.

However, I think now is the right time to conduct experiments and test audits to see whether we can reinvent the classic audit to meet the technology of today. In a future post, we will explore what this means broadly for jobs and more specifically how this could impact the profession.

Author: Malik Datardina, CPA, CA, CISA. Malik works at Auvenir as a GRC Strategist that is working to transform the way we do financial audits. 

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