Abstract
Auditors increasingly employ technologies to improve audit quality. Using a design science approach, we examine whether using drones and automated counting software can improve audit quality and thus financial reporting. We assess three dimensions of audit quality—efficiency, effectiveness, and quality of documentation. We show that auditors can perform inventory counts with these technologies much more efficiently than they can with manual techniques, decreasing count time in our study from 681 h to 19 h. Similarly, auditors can maintain or improve audit effectiveness, decreasing error rates in our study from 0.15% to 0.03% while providing higher-quality audit documentation. Interviews with national-level partners and audit standard setters highlight impediments to adopting these technologies, including firm concerns about being first movers combined with inability of standard setters to provide guidance at a pace that matches the pace of technological development. Collectively, our results suggest that technology-enabled inventory audits can improve audit quality and further regulatory guidance on using such technologies would enhance adoption.
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Notes
We focus on cattle and sheep because current technologies are best suited to counting homogenous items. Companies and audit firms are developing technology to measure assets other than animals, in particular, heterogenous inventory stored in warehouses. To count warehouse inventory, which is often stored in boxes, the drones must be outfited with infared or other types of scanners to determine the contents of the boxes.
Austin et al. (2020) present interview evidence that auditors and their clients are likely to have conflicting beliefs about how the audit fee should be affected by the auditors’ reliance on technology in the audit. Clients hope that increased audit efficiency will translate to lower audit fees, while auditors indicate that they cannot lower fees because they must recoup the firm’s very large investment in technology. Some auditors and regulators in that study suggest that the audit fee model may need to change as a result of these changes to the audit process.
Most companies invest considerable resources into managing their inventory (Feng et al. 2015; PWC 2016). PWC (2016) estimates that companies spend as much as $127.3 billion on labor and services related to inventory management. Feng et al. (2015) show that these investments pay off—companies with better controls over inventory (including controls over inventory identification and tracking) have higher sales and profitability and fewer audits with material weaknesses.
This statement is true for measuring existence and completeness, but additional work is necessary for identifying the proper value of each animal.
All employees involved in the manual counting are full-time employees for the company. Thus their time spent counting inventory represents an opportunity cost to the company, occupying employee time that could be used for other productive activities. Many companies outsource such activities, representing a direct cost to the companies.
The internal auditors involved in the manual counting as well as the cowboys who heard the cattle are full-time employees for the company. Thus their time spent counting inventory represents an opportunity cost to the company, occupying employee time that could be used for other productive activities.
Cowboys occasionally request another count if the count does not match the computer system, as incorrect counts reflect poorly on the cowboys’ performance.
The personnel indicated that overall counts were rarely inaccurate, but the counts of individual pens could be off by a few cows if the cowboys did not record changes in a timely manner.
Drone laws and regulations differ across municipalities, states, and countries, which may constrain companies and auditors’ use of this artifact in certain locations. The following website summarizes drone regulations and laws by locality, state, and country https://uavcoach.com/drone-laws/.
The DJI Mavic Pro was originally released in 2016 but has been updated several times since then and has a retail price of approximately $100 to $1500. It boasts better battery power (e.g., longer flight time of approximately 27 min) and a better flight range than the DJI Phantom 3.
We tested the height at which the drone would bother animals. We noted that the animals did not seem concerned when the drone was 10–15 ft above them. We took almost all of our images at more than 200 ft above the animals, and therefore it is unlikely that they noticed the drone.
The highest quality image was selected using professional judgment. Images were deemed to be of higher quality if they captured the entire pen, were not blurry, and did not need to be rotated.
We learned that this number of images was unnecessary for our purposes. On our second count, we captured only a single image for each pen of cattle.
Full-size color versions of the images can be downloaded by logging into the EYARC website at https://eyonline.ey.com/eysso/unprotected/logon.aspx. This website also contains a classroom case built using the same data.
At the time of writing, Counttthings.com advertised charges of $100 per month per device or $1000 per year per device. For a single audit using the protocol and equipment we used, we estimate it would cost $1200 for a drone, $150 for the drone pilot exam fee, and $100 for use of the software. Thus total costs for a one-off audit would likely be less than $1500 (not including study time or learning how to fly a drone). The significant time savings of auditors who bill at high hourly rates, suggest this would result in substantial cost savings for the audit firm.
We used the Countthings.com software in May 2018. Given that the templates are developed by supervised machine learning, they should continue to improve as Countthings.com trains the images with more and more data. Using the app requires very little training. The user uploads a picture, selects the area to count in the picture, and the program identifies everything in that image to count.
We only use “entry-level” drones widely available to the individual consumer. Accounting firms and businesses would likely not be as financially constrained in their drone purchase and thus could afford much more sophisticated drones that would operate well in adverse weather conditions.
First, the authors learned that a single drone image was generally of sufficiently high quality that it was unnecessary to take multiple images of each pen. Second, the authors learned that the battery life of the drone was impaired by high winds, which makes the drone “work” harder to stay in position. Third, the authors found that at certain times of the day, the sun casts shadows that would likely be counted as cattle by the automated counting software. Thus the third column presents the results of a sample of counting after the counters had basic experience performing the task.
This figure includes auditor and employee (i.e., cowboy) time.
We compute this amount by extrapolating the time the audit team took to count the sample.
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Acknowledgements
We thank Deniz Appelbaum, Kristina Demek, Jacob Jaggi, Uday Murthy, Conrad Naegle, Miklos Vasarhelyi, and workshop participants at the BYU Accounting Research Symposium, AIS Midyear Meeting, University of Duisburg-Essen, University of Nebraska, University of Texas San Antonio, and the Oklahoma State University Ph.D. Alumni Research Conference for their helpful suggestions and comments. We thank Catherine Banks and the EY ARC for providing funding for this study. We are also grateful to the ranchers and cowboys at the sheep ranch and cattle feedlot for their time and providing access to their livestock, documentation, and personnel.
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Christ, M.H., Emett, S.A., Summers, S.L. et al. Prepare for takeoff: improving asset measurement and audit quality with drone-enabled inventory audit procedures. Rev Account Stud 26, 1323–1343 (2021). https://doi.org/10.1007/s11142-020-09574-5
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DOI: https://doi.org/10.1007/s11142-020-09574-5