Inventory Audits & The Internet of Things

Auditors in the future will never know how good they’ve got it.

Inventory Audit Internet of Things

My first job in accounting was with a local firm in Reno, Nevada. One of the engagements I performed every year was an inventory audit over a telephone pole manufacturer. The manufacturer wasn’t actually a client of our firm. Their full financial statement audit was performed by a firm in California. The California firm just outsourced the inventory counting part to our firm because they were no dummies.

Each year, on the company’s year-end of October 31st, another poor soul and I took a 45-minute drive out to a dusty lot in the middle of the Nevada desert to count telephone poles.

We would arrive at the crack of dawn, armed with a sample selection of certain poles we needed to count, identified by their length and the type of preservative the poles were treated with.

Now, if you’ve made a career of manufacturing telephone poles, it’s probably easy to tell the difference between a 40-foot Creosote-treated pole and a 45-foot Penta-treated pole. For a 20-something staff accountant, this isn’t so easy. And the 10-acre lot wasn’t organized by pole length or preservative. There were just piles of poles all over the lot. Finding a pile and being able to trace it to something we needed to count was a cause for celebration.

Because the employees who worked there weren’t completely heartless, they would occasionally slow down as they cruised by in their golf carts and point us in the general direction of the piles we were looking for. They also gave us wax crayons to mark the poles as we counted. That was great – except for one year when I had a color-blind partner who couldn’t tell the difference between my red crayon and his green crayon markings.

Year after year, I spent a 12-hour day trudging around that lot, marking and counting poles, driving home sweaty, exhausted and reeking of chemicals. But I felt like I was doing something important. I was generating revenue for the firm and performing a vital part of a financial statement audit. If the company tried to claim they had 132 45-foot Creosote poles when they really only had 123 45-foot Creosote poles, I was going to uncover the fraud! (We actually never saw any evidence of fraud.)

After a couple years of being the staff accountant on this job, I got a chance to run the job for a couple of years. After a particularly miserable year, my manager asked me whether I thought we should continue performing the engagement since the working conditions were so miserable. I responded, “Hey, it’s not a fun job, but I don’t mind doing it if it’s profitable work for the firm.”

That’s when I found out that actually, it wasn’t profitable work. The firm LOST MONEY on this engagement every year. And this was the only work the other firm referred to us, so it wasn’t as if we were eating the loss on this one job but making up for it in other, profitable work they sent our way.

WHAT THE?!?!!?? Why were we doing this work?

I’m writing this story down now, because someday soon, poor little staff accountants will never have to count piles of telephones in the Nevada desert ever again. And just in case the wood-preserving chemicals addled my brain, I want to make sure I remember these details so I can be sure to tell those newbie staff accountants how good they have it.

Recently I was ghostwriting an article for a client on which technology will have the biggest impact on how accountants do their jobs. Chatting with my client about the topic, she suggested it’s not just one technology that’s going to have an impact. Rather, it’s the convergence of several technologies bringing together vast amounts of data with machine learning, AI and automation.

After we chatted about the topic a while longer, I started writing the piece, doing a little of my own research to fill in the gaps as I wrote. And as I researched, I realized how closely this topic related to my experience of counting telephone poles in the desert.

I’m not a technology expert, but I’ve had to educate myself enough on the Internet of Things (IoT), blockchain, machine learning, and artificial intelligence to turn a 15-minute conversation with an expert into a 10-page white paper. Here’s a little of what I’ve learned about IoT.

The IoT is made up of billions of devices that all connect to the internet and talk to each other. Think about that FitBit on your wrist, the Nest thermostat controlling the temperature in your home right now, or the smart crockpot that allows you to check on dinner while sitting at your desk at work. By 2020, Cisco and DHL predict there will be 50 billion connected devices making up the IoT.  All of these connected devices generate vast amounts of data.

In retail inventory, cloud-based inventory systems track items in real time. Products have RFID tags that are scanned and identified by the system, giving retail workers (and their auditors) visibility into inventory levels, item location and more.

In the not too distant future, every one of those thousands of telephone poles laying in the Nevada desert will have an RFID tag giving even more information about that inventory. We’ll be able to track a pole from the time it comes out of a mill, through being treated with the preservative, stored on a lot and installed along some remote highway. We’ll know if damage occurred during transit and the exact chemicals and temperatures each pole has been exposed to. All of that information (and more) will feed into an inventory system. Every single pole will have a unique identifier and built-in GPS will allow us to pinpoint the location of every single pole on the lot, in real-time, from anywhere. All of that information will be stored on a blockchain, where entries cannot be falsified or removed.

A staff auditor tasked with auditing inventory won’t have to do test counts of inventory. They’ll be able to reconcile 100% of the inventory to the general ledger in far less time than it took us to drive out to that dusty desert lot.

That’s pretty exciting, right? And good news for new accounting graduates who won’t have to “pay their dues” counting telephone poles in the desert. Rather than spending an entire day counting telephone poles (or any other soul-crushing work that, let’s be honest, clients don’t give a hoot about), they can spend their time focusing on what clients actually care about – running a profitable company.

Auditors of the future will never know how good they’ve got it.

Internet of Things Inventory Audit

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