During the Finance & Accounting Show 2018, Florian presented his view on the future of accounting during his “Bookkeeping 2020” talk. He adapted the 6 levels of autonomous cars to the accounting world, going through the history of accounting in the context of automation, and how accounting automation might play out in the coming years.
The 6 Levels of Automation towards Self-Driving Cars
The most used roadmap to self driving cars is the Automation Levels by SAE:
- Level 0: No Automation – Human drivers is fully in charge
- Level 1: Driver Assistance – The system and human work together to steer and accelerate/decelerate
- Level 2: Partial Automation – The system takes charge for both steering and acceleration/deceleration, while human drivers monitor the environment and needs to take over when the system fails
- Level 3: Conditional Automation – The cars can drive itself, though the human driver is expected to take over in case of failure.
- Level 4: High Automation – There is no need for human driver to take over.
- Level 5: Full Automation – Human driver is not needed. The car layout can be completely revamped, as there is no possibility for a human to drive.
So, what would the automation levels for accounting be?
Let’s go through one by one.
Level 0 of Accounting Automation: None… Full Debit/Credit
Since documented by Luca Pacioli in 1494, double entry accounting requires every transactions to impacts different accounts with debit and credit transactions for equal amounts (debits = credits). The method is great and allows recording of any accounting transactions.
However recording all journal entries this way is time consuming.
Status: Has been available since 1494.
Level 1 of Accounting Automation: Base Transactions
Because transactions such as Sales and Purchases have an expected behaviour they can be partly automated. A Sales invoices should impact a revenue account (or another account to credit), with the receivable account being debited automatically. Similarly, a purchase should debit an expense account (or whichever account), with a payable account being credited on the other side.
That’s what happens in Xero when recording Sales Invoices and Purchase Bills for example.
(side note: The behaviour can be used to automate accruals recording – See our guide How to Record Accruals in Xero)
Status: Has been available for many years.
Level 2 of Accounting Automation: Link transactions
Many accounting transactions are related between each other. Modern systems allows to link them, making review and understanding of transactions and financial statements much easier, and more powerful.
- Assets & Depreciation: Purchase of Assets imply that depreciation will follow. Software such as Xero automatically update a registry of Fixed Assets when a purchase is identified as an asset. The depreciation can be calculated automatically based on the policy set. The role of the accountant is mostly to set the depreciation policy.
- Supporting Documents: Gone are the days when looking for documents was needed. Now documents are attached directly on transactions. This means any question on a transaction can be reviewed with the document showing up in seconds. Audits get dramatically simplified, as auditors can access both the statements, transaction details and supporting documents… all in one place, linked one to another.
- Accruals: Recording of monthly accruals can be automated using systems such as Xero, and identified against their initial transactions (See our Guide to Record Accruals). AS a benefit, audit schedules can be generated instantly, at any time. It gives instant visibility into prepayments, deposits, deferred revenue and similar accounts.
Status: Has been available for years.
Level 3 of Accounting Automation: Pre-Processed
With accounting systems being more and more powerful and connected, transactions can be pre-processed
- Purchases: Email-to-bill is a Xero feature which allows to send PDF to the accounting software, and Xero applies recognition technologies and AI to identify whatever it can: supplier name, account to record against, amount, etc… Xero add-ons such as Receipt Bank, Datamolino and Hubdoc can also help. Accountants just have to review what’s been prepared by the machine and click ‘Approve’
- Sales & Payments: Sales invoices can be generated directly from Xero. Payments can also feed directly the system, and be pre-associated to the correct invoice.
- Bank Reconciliation: With more and more bank feeds available, there is no need to wait weeks or months to reconcile bank transactions (when no bank feeds are available, check Bank2Xero to accelerate the process so it never takes more than 4 minutes to import a bank statement to Xero). Every day, latest transactions pop-up in the accounting system, allowing prompt reconciliation. Benefit include live view into cash balances and short term cash forecast. Payables and Receivables can be kept up-to-date.
Status: Available currently.
Level 4 of Accounting Automation: Full Recording
Once the OCR (digital character recognition) and AI (Artificial Intelligence) levels will be good enough, there will be no reason to involve a human to valid what machines will have pre-processed. Transactions will be fully automated and recorded without human intervention.
Level 4 is an extension of Level 3 when accuracy levels reach high enough level. With Xero investing a lot in AI and machine learning, and general progress in recognition technology, we should reach this stage soon. Maybe 2 years?
By then, most transactions will be recording automatically. The role of accountants will be to detect potential errors (zenflow, our RoboCFO, helps ensure accounting accuracy). Instead of “Bookkeepers”, they will become “Botkeepers” 🙂
Status: To be available soon… 2020?
Level 5 of Accounting Automation: Ecosystem
With full automation reached at Level 4, new usage will become possible
- Instant Audit Confirmations: As Banks can already feed accounting system automatically, why would auditor need bank confirmations through paper… a time consuming (several humans are involved on the way), slow (each step takes a few days) and prone to error (humans have a tendency to add mistake during repetitive work). Banks could send data directly to auditors, which can automatically compare with accounting numbers. Once this happens, how will auditing work change? Would audit move from once a year, one-off process, to constant validation, providing more value, faster to their audience?
- Regulatory: With financial information available automatically, will systems be automated to file tax and other regulatory requirements without human intervention? Law can and will be programmed, the best tax calculations will follow. Faster, more complete financial information can improve public policies. Xero already covers 40% of New Zealand GDP and 12% of Australia GDP. Xero Small Business Insights allows to know trends such as cash flows and employments in Australia and New Zealand… How can governments leverage such data to update policies faster?
- Cash Flow & Funding: How about using accounting system to pro-actively propose loans and investments to businesses? Banks, investors and other funding organisations could set criteria which the accounting system will analyse automatically. Business passing the criteria would receive a proposal to be introduced to the bank/investors. All financial data being already in the system, due diligence would be a matter of seconds.
Status: A few more years…2023? We will send men to the #DearMoon by then, we should be able to connect data across a few organisations.
Note: The views shared in this article are the author’s one. Neither the author nor Future Flow is affiliated with Xero.