CATS2016: Exponential Tech & the CPA

Today, I presented at the Canadian Accounting Technology Show and discussed how exponential technologies and their potential impact on the profession.

During the presentation, I promised a blogpost for the attendees who wanted to dig deeper in the presentation. So here it is!

IBM Watson's Victory over Ken Jennings
During the talk I refer to Ken Jennings and Brad Rutter's defeat at the hands of IBM's Watson. (See Engadet's video for more on this "exponential event".)
This post gives some background on the new "space race" between the tech-giants for the killer AI app and also gives a link to Ken's talk.

For additional information on Watson and the medical profession check out this video.

Exponential versus Linear Technological Change
Kodak - who invented the digital camera in 1975 - was ultimately disrupted by that very same technology. In fact, one of their employees applied Moore's Law to pixel's per dollar in digital cameras.

Why?

The problem illustrate that Kodak (as well as Polaroid) had linear thinking and didn't realize how quick digital technology would become the norm and preferred way of consuming photography. In this post, Peter Diamandis talks about how 30 exponential steps contrasts to 30 exponential steps (and talks more broadly about linear vs exponential thinking) and Ray Kurzweil talks about the infamous story of how the inventor of chess requested an exponential amount of rice (and is rumoured to have lost his head).

Predictions on the Automation of White Collar Work:
These stats are what actually prompted me to propose to CPA Canada that we should have a talk that would discuss this phenomenon. The variety of sources that have chimed in on the topic - combined with the understanding of exponential change - highlights the importance of looking deeper into the trend instead of dismissing it as just fear, uncertainty and doubt (FUD). This of course is not just limited to the accounting profession, but impacts all white collar worker (check out IBM's Watson latest application to automate aspects of the legal profession

• "Job destruction will happen at a faster pace, with machine-driven job elimination overwhelming the market's ability to create valuable new ones.” (Gartner)
• “…knowledge work automaton tools and systems could take on tasks that would be equal to the output of 110 million to 140 million full-time equivalents (FTEs).”’ (McKinsey)
• ‘94% probability accounting/auditing will be automated’ (Oxford Study)
• Finance Department has seen a decrease from an average of 119 people (2004) to 71 people (2014); a reduction by 40% (Hackett Group; as taken from this WSJ article "The New Bookkeeper Is a Robot")

Exponential Technologies
As noted during the presentation, the key exponential technologies that are likely to enable the automation.

Artificial Intelligence: "Science of making computers do things that require intelligence when done by humans." During the presentation, I mention this pharmacist robot being able to dramatically reduce medications errors, which according to the FDA is responsible for 1.3 million injuries.

For other information check out this Deloitte publication on AI and Cognitive.

Internet of Things: "Billions of interconnected sensors and devices will soon exchange data; effectively the physical flow of goods, people, and things will now leave a “digital trail”." RFID inventory does provide some insights in how this digital exhaust left by physical goods can improve inventory management and responsiveness to customers (see this RFID Journal article for more details).

For more on IoT, check out the Deloitte TMT Prediction regarding the technology.

Blockchain: "The blockchain dis-intermediates the need for a centralized trusted authority to administer an exchange of value between parties." As I note in the presentation, I feel the blockchain needs a lot of nuance when discussing how the technology has the potential to disrupt the profession. The technology (as implemented in the exchange of the cryptocurrency Bitcoin) itself won't replace the audit because its controls are designed for the purposes of giving comfort to a retailer, such as Overstock.com, that the buyer has not spent the currency somewhere else. However, if a retailer was then to tell an auditor that they sold goods to these public addresses, the auditor would need to verify that the retailer was not selling the goods to itself (i.e. they would need to verify that the addresses that the retailer sold to are not controlled by the retailer). In other words a sale for the purposes of Bitcoin is not a sale for accounting purposes.

That being said, auditors can’t ignore blockchain as it is the first decentralized approach to exchange value that eliminates the need for a trusted intermediary.

To understand the blockchain better, check out the following videos:

• Blockchain technology will drastically change our lives: This video gives a good overview of the implications of bitcoin and illustrates the role of the network in maintaining the ledger.
• How Bitcoin works under the hood: There is a 5 minute non-tech video, 5 minute tech video and a 22 minute video, which all do a good job of using animation to explain how bitcoin is tamper-proof.
• Khan Academy: The videos are about 90 minutes in total, but it is comprehensive. 

Crowdsourcing: "Process of obtaining needed services, ideas, or content by soliciting contributions from a large group of people, and especially from an online community, rather than from traditional employees or suppliers."

For more on crowdsourcing, I wrote a post on the potential impact on crowdsourcing. The post gives a good background exploring the use-cases brought up by Jeff Howe (who coined the term crowdsourcing).

Near the end of the post, I noted that:

"Can accountants/auditors be crowdsourced like the way professional photographers were? It seems were crowdsourcing works best is an arena where you find hobbyists who do such things out of passion instead of obligation."

Since writing that post I found Gigwalk which illustrates how non-expert tasks within accounting or auditing can be done by the crowd (see this post near the bottom). Also, during the CATS conference it was noted that 50% of practitioners will be retiring over the next 5 to 10 years. Such retirees could form a huge pool of people who want to work casually in their retirement thereby enabling the audit to be crowdsourced.

Concluding thoughts
To meet the challenge of the exponential change, I feel that we need to do the following:

• Hands-on Approach to Technology: University courses on programming, data analytics and data sciences should become a standard part of the accounting student's education. Although tools change over time, I think accounting students who have an open-source statistical package like R would have more options in terms of employment. With respect to data science, (audit) sampling belongs to an era of small data. Consequently, for auditing theory to be keeping pace with the way big data is transforming the way organizations are dealing with their data auditors need to be able traverse data science and auditing theory. 
• Bring in the "hackers": An extension of the above recommendation, is to get the people who think outside the box and disrupt the way we do things.
• Greater focus on cyber security: According to Alec Ross, cyber security is currently a 400 billion dollar problem and is expected to be a $175 billion industry by 2020. Security is a natural extension for CPAs who already need to understand internal controls, governance and concepts of risk (impact, likelihood, threats, etc.). With IoT, the security risks can only be expected to grow exponentially as now even the IoT-enabled fridge can be hacked (and the FTC thinks so as well).
• Smart Contracts+AutoRepos of Smart Cars = Flash Crash¹⁰: As I have written previously about AlgoTrust (second post and first post), I noted that this was another area that CPAs can focus on - auditing algorithms. Just imagine how, these algorithms can feed into blockchain enabled smart contracts that could trigger a massive repossession of smart cars - leaving a city in chaos as people try to figure out how to get home. In other words, CPAs can act as independent monitors of algorithms to ensure such risks are safeguarded against. 
• CPAs-as-a-Crowd: CPAs should leverage the combined power of social and cognitive to get smarter by sharing knowledge and using "smart rooms" that use machine learning and other AI technologies. 

To brings such change the profession, will not the work of one entity alone. Firms, educators, professional bodies and companies need to work together to ensure that the CPA profession will thrive in the world of exponential change that is just around the corner. 

Author: Malik Datardina, CPA, CA, CISA. Malik works at Auvenir as a GRC Strategist that is working to transform the engagement experience for accounting firms and their clients. The opinions expressed here do not necessarily represent UWCISA, UW, Auvenir (or its affiliates), CPA Canada or anyone else.

Cloud vs corporate IT: Insights into how the share-economy will play out?

When thinking about disruption we often attempt to look to the past for how it will affect our future. However, we can also explore how disruptive tech is impacting our world today.

Consider a recent WSJ article that gave us insights in to how cloud and mobile is disrupting "classic tech":

• EMC, Intel and IBM are being disrupted. The move to cloud and mobile is impacting the ability of these companies to meet earnings expectations. For example, EMC's sales of storage products declined by 10%, while Intel has seen an overall decline in PC Market sales.
• Companies are slashing their workforce in response to such trends. The shift to cloud & mobile is resulting has resulted in the hemorrhaging of 12,000 jobs, or 11% of the workforce, at Intel alone. 
• Overall decline in revenues/profits despite strategic shifts in product mix. IBM's cloud computing business grew 34%, while Intel's data centre business, serving cloud providers grew 9% (for more on this "corporatification trend" see here). However, IBM's total revenue fell almost 5%. Intel had a tough time keeping up with rivals like ARM who posted revenue gains of 22%. This compares to 7% of which the WSJ attributes a chunk of that rise to an acquisition Intel made. 

Reflecting on these trends, is it fair to think of cloud as the original use case for the share economy? 

When we think of Uber, Airbnb, etc., we see how users can use these platforms to monetize their excess or underutilized asset by renting it to others.

However, isn't that also the story of the cloud?

Amazon, Intuit, and other cloud computing companies decided to "share" their excess computing capacity to others. In a sense, we are talking about servers instead of houses, but the concept is really the same.

And this goes to my initial point. We are living through the disruptive impacts of cloud and mobile on legacy-tech and we can quantify, analyze and understand its impact.

Given this premise what does this above tell us about the share-economy?

Firstly, better utilization of assets leads to the sale of less assets.  This should be expected as there is a more efficient use of assets leads to  (servers, car, house, etc) less market size as demand remains constant. As I had noted in the post a few months ago, Uberization of the taxicab industry would ultimately lead to a fleet of cars that are owned by a company like Google - leading to a net reduction of cars used by society. GM probably understands this concept as they have invested $500 million into Lyft; a competitor to Uber.

Secondly, it illustrates how the share-economy is subject to concentration of wealth: the cloud computing landscape is dominated by large players, including Amazon, Google and Microsoft. As noted by Douglas Rushkoff in the following video, since these innovations emerge out of the "operating system of capitalism", they inevitably result in the formation of a handful of platforms dominate the industry and capture the lion's share of the profits.


(Also check out his book that discusses this in more depth)

Thirdly, its difficult for behemoths to adjust to these types of shifts. Despite Intel and IBM investing in the disruptive technologies, it's hard for them to adjust to the dynamics of the new economy. This illustrates how much more challenging it will be for those disrupted by such platforms to re-tool and compete in the landscape.

For accountants and auditors, one such platform to watch out for is Gigwalk. As per their website, their value proposition is that by leveraging the 350,000 “professional services” workers (see graphic below) the manufacturer or other upstream supplier can get visibility into the actual retail outlet. For example, Whirlpool wanted to “Audit the presence of its Swash product on showroom floors, communicating back to corporate compliance gaps in real-time”.

And the "starter Store Audit Package" begins at $10.

Creative destruction is not inevitable, but we should learn from the lessons of these tech giants and plan prudently to meet such challenges head on.

Will Accountants be Uberized? Part 2: Crowdsourcing and the rise of Pro-Ams

This is part 2 of a series of blogposts that I will write (aiming for 3 parts, but let's see) on how CPAs can be uberized. In this exciting installment, we explore how crowdsourcing and the rise of ProAms (professional amateurs) has altered other professionals, such as photography.

In the last installment, we explored how Uber was actually not a 1:1 replacement of the taxicab profession. Cab drivers fill a social function that ensures that people can from point A to point B safely, accommodates their disabilities and at a regulated rate. However, taxi cab still actively cash out now as we can expect Google to fill in the societal gaps that Uber appears to be unable to. Google could actually revolutionize car ownership by make their driverless cars they sell "ready-to-share" thereby enabling people to benefit from the share economy (imagine your car running around town earning money while work, sleep, play, engage in activism, etc!). Alternatively, they could go own a fleet of cars that people effectively rent in a way that's cheaper than owning a car altogether.

Crowdsourcing as Jeff Howe, who authored the original 2006 Wired article that brought notoriety to the concept, where he was trying to describe the phenomenon of using the Internet to outsource work to individuals, defines it as: “is the act of taking a job traditionally performed by a designated agent (usually an employee) and outsourcing it to an undefined, generally large group of people in the form of an open call.”
 In his book he highlights the following uses to illustrate the impact of crowdsourcing on how companies do business:

• Threadless: Is a great example of how the crowdsourcing brought life into the commodity business of selling t-shirts. In a nutshell, the crowd submits t-shirts designs, then the crowd votes on what designs are best and the designs that win are sold to the same crowd who already voted on them being the best! (For more details see the wiki article on Threadless)   

• P&G hires scientists via Innocentive to solve problems that they can’t. As noted in the Wired article, Colgate-Palmolive "needed a way to inject fluoride powder into a toothpaste tube without it dispersing into the surrounding air". So the posted the challenge on Innocentive and Ed Melcarek, who has Master degree that is related to particle physics, "knew he had a solution by the time he’d finished reading the challenge: Impart an electric charge to the powder while grounding the tube. The positively charged fluoride particles would be attracted to the tube without any significant dispersion".  

• iStock Photo: Instead of hiring professional photographers to make stock photos, iStock solicits photos from the crowd. The Wired article explains how the Claudia Menashe, director at the National Health Museum, was about to buy $600 worth of stock photos from a professional photographer Mark Harmel. However, she bought the photos from iStockPhoto for a fraction of the price at $1 a piece. iStockPhoto was snatched up by GettyImages “the largest agency by far with more than 30 percent of the global market, purchased iStockphoto for $50 million”. 

• Howe's book (see pages 61-63) also discusses how NASA relied on the crowd to classify the age of craters. A professional had taken 2 years to complete a similar study that was done by these “clickworkers” over a month with results yielding a “comparable degree of accuracy”.

Can accountants/auditors be crowdsourced like the way professional photographers were? 

It seems were crowdsourcing works best is an arena where you find hobbyists who do such things out of passion instead of obligation. My dad was a hobby photographer and although I am no way near talented as he was, I love trying to capture those unique moments. For example, I was able to capture this unique division sunset with my Samsung Note 4

In other words, if I decided to put my mind to it, I could be potentially competing with Mark Harmel. 

However, are there hobby auditors or accountants out there that would compete with CPAs? 

I have yet to find one!

There's a case that can be made for the impact of David Weinberger's "networked knowledge" (book, YouTube video below) on the dilution of expert knowledge in general (law, medicine, accounting). What he proposes is that the ability to share, link and debate information on the Internet transforms knowledge into a more fluid state in contrast to the static nature of books. 

With respect to accounting, non-professional accountants can network with each other to get an understanding on how to account for stock provisions, but would management or the SEC find it acceptable that a company determining its accounting position by looking it up on Google Groups?

And that takes us back to the issue we discussed in the last blogpost: when disrupting a profession it's not just about the production of a good or service but also the social function that the profession was fulfilling. Public accountants have a fiduciary responsibility to the users of financial statements to ensure that they are free of material misstatements. Failure to fulfill this responsibility can result in fines, disciplinary measures or even loss of one's designation.

However, as Google's driverless cars could step in where Uber can't, could IBM's Watson step in and fulfill that societal function that accountants currently do?

To be concluded next time...

CNET, CES and Crowd-sourced audits: Independence does matter

In a previous post, I looked at how the editorial interference from CBS forced CNET to award the Best in Show category to another contestant because CBS was involved in litigation against the company who actually did win best in show. The perspective that I took was more of a "decision usefulness" perspective: could a reader actually figure out who the real winner is due to the use of disclaimers. 

Others were much more outraged over this lack of objectivity. 

Since my post, Greg Sandoval, a reporter at CNET, has resigned over the controversy (click here to see his tweet).  More importantly, the Consumer Electronics Association (CEA) itselft has taken a firm stand against this move by CBS. As noted in this press release, they have effectively overturned CNET's decision and have awarded the Best in Show to both the Hopper and Razor's Edge (effectively CNET's second choice). They have also are requesting a request for proposal for "a new partner to run the Best of CES awards program". 

Looking at the heart of the issue, the question is how does one maintain independence when reporting on a matter? 

We can take a look at what the Canadian Institute of Chartered Accountants (CICA) and the Canadian Public Accountability Board (CPAB) have written about independence in this publication. On page 7, they cite the International Ethics Standards Board for Accountants (IESBA) and breakdown independence in two categories: 

• "Independence of mind: The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism.
• "Independence in appearance: The avoidance of facts and circumstances that are so significant that a reasonable and informed  third party would be likely to conclude, weighing all the specific facts and circumstances, that a firm’s, or a member of the audit team’s, integrity, objectivity or professional skepticism has been compromised."

The publication also a number of threats to independence. The two probably most relevant are the "self-interest threat" and the "intimidation threat", which I think are probably most relevant to the CNET-CES controversy. Effectively, CBS's objectivity of the reporters was put aside in favour of the self-interest emanating from their litigation against DISH (who makes the Hopper). 

But the more interesting one to explore is the "intimidation threat". And this is most felt by reporters and editors who are pressured to abandon their view in favour of what the parent company wanted. And it speaks to a fundamental flaw in journalism: the press depends on money from the companies and others that they need to write about. The biggest illustration of this is what went down between Fox News and Jane Akre and Steve Wilson when they were forced to stop reporting about the health effects of drinking milk from cows that had been given Monanto's Bovine Growth Hormone. The reporters were fired when they refused to give into the "intimidation threat". They initially won their case under Florida's whistle blower law, but when Fox appealed they lost. The reason? The media has no obligation to tell the truth.  

So the challenge remains as to how does one remain independent when they need to eat and pay their bills in a free market system? Greg took the principled stance as, Jane Akre and Steve Wilson did, but not everyone can afford to pay the prices. People have to pay rent and take care of their families. The reality is that if society really cares about have access to information that has integrity they need to pay for it.

Is it time to have audited standards for the media, similar to the one used for financial information generated by financial companies? 

Although not perfect by any stretch of the imagination - the accounting scandals, a la Enron, serve as an important reminder of the lack of perfection in the system - the way financial information is subjected to testing serves at least as a starting to point as way to understand what needs to be there to ensure the information has integrity. 

Another probably more plausible approach is to leverage crowd sourcing and organize it to enable people comment or blow the whistle on information that is produced in a manner that is inaccurate, incomplete or invalid. The Guardian actually did this for the MPs expenses: they built an app that allowed ordinary users to analyze MPs expenses (if interested check out the Google Docs Spreadsheet with this info). As noted in the article, there was another attempt to build such an app (see here for the alternative). This is both good and bad. It's good in the sense that no one organization has the ability to monopolize such initiatives. However, it is bad in the sense that the efforts of the crowd are effectively divided. Regardless, it does illustrate that the potential for "crowd sourced audits".