The impacts of industry 4 0 on the accounting information quality

This report presents a number of factors inIndustry 4.0 that related to change in accounting information quality and helps the readers toanswer these question: Why the computational powe

The fourth industrial revolution is here This is the next evolution of technologyanalytics, automating processes, artificial intelligent, making them smarter and better.Therefore, Industry 4.0 could be used successfully as a basis upon which to leverage theaccounting information quality However, are business leaders and governments havemaximize the full potential of the fourth industrial revolution in the way it developaccounting? In this report, we seek to examine ‘‘The impact of industry 4.0 on accountinginformation quality’’

The purpose of this study is try to analyze how technology development during theindustry 4.0 could affect the qualities of accounting information Over the last few years, Thefourth Industrial Revolution has been changing the ways that the accountants thought abouttheir jobs and the way they did their works This report presents a number of factors inIndustry 4.0 that related to change in accounting information quality and helps the readers toanswer these question: Why the computational power growth go together with thedevelopment of accounting ; whether the data volume affected by industry 4.0 influencesaccounting information quality; and how the better connectivity all around the World couldhelp develop accounting During our researches, we also find out some solutions to improve,qualities of accounting information, helping individuals and organizations enhancecompetitiveness in the field of accounting in the era of the fourth industrial revolution

B LITERATURE REVIEW

I Industry 4.0

The term Industry 4.0 refers to a further development stage in the organization andmanagement of the entire value chain process involved in manufacturing industry Anotherterm for this process is the “fourth industrial revolution” or Internet of Things In short, it isargued that advanced information technology and social media networks will allowbusinesses, facilities and machines throughout use smart networks to develop a level of self-awareness that was not previously possible This will allow the machines that manufactureproducts themselves to “suggest task arrangements and adjust operational parameters tomaximise productivity and product quality” To date focus on the development of Industry 4.0

has been on reduced errors, improved product quality, freeing humans from menial (Burritt Roger , Katherine Christ, 2016).

Before this Industry 4.0 appears, there are three step of industrial revolution Industrialrevolution is process of change from an agrarian and handicraft economy to one dominated byindustry and machine manufacturing This process began in Britain in the 18th century andfrom there spread to other parts of the world Revolution 1.0 transformed the world in the1800s It was powered by coal and moved by iron machines and factories, railways andsteamships The telegraph allowed for instant communication across oceans and continents.Agricultural innovations such as enclosures, crop rotation, selective breeding broughtproductivity gains freeing rural labor Revolution 2.0 shaped the 1900s It was powered by oil.Cars, buses and planes were the new means of transportation The telephone, TV, cinema andradio transformed communication and society At the same time Revolution 3.0 is gainingstrength and beginning to shape the 21st century Internet and billions of mobile andconnected devices are rapidly redefining communication Renewable energies are gainingground to fossil fuels Networks of electric and hydrogen powered drones and autonomous

vehicles are poised to redefine transportation (Encyclopaedia Britannica, 2018).

Figure 1: Definition of Industry 4.0

(Deloitte, 2016)

Industry 4.0 is driven by improved data gathering processes, thereby lowering cost ofdigital electronics, reducing size of components, facilitating portability and increasing

availability of data through connected machines (Burritt Roger , Katherine Christ, 2016)

Industry 4.0 is increased connectivity of networks using the Internet of Things andInternet of Services through Cyber-Physical Systems The Internet of Things is the network ofphysical devices (things) embedded with networked microchip technology, software, sensorsand controllers, while the Internet of Services is the offering of services through the internet Industry 4.0 is a vision of industry as it could be in the future or rather an aim to worktowards Initially, Industry 4.0 was seen as a way for Germany to maintain a competitive

advantage over emerging economies which have lower labour costs (Burritt Roger , Katherine Christ, 2016)

Figure 2: The industry 4.0 environment

(Deloitte, 2016)

Commentators recognise there are no benefits over the rate of take up of Industry 4.0technologies They guess about anticipated large changes ahead with claims such as “Industry4.0 is just beginning to take off and it’s difficult to imagine exactly how it’s all going todevelop”

Although this guess, large amounts of money are being invested by governments andbusiness to try and make the Industry 4.0 vision a reality

The fourth industrial revolution has been promoted as providing annual efficiency gainsfrom resource productivity in manufacturing, greater capital intensity and more flexiblemodels of work organisation through improvements in machine to machine information andcommunication technologies (Burritt Roger , Katherine Christ, 2016)

II Accounting Information Quality

Accounting information of a firm is its financial information which is gathered,categorized and manipulated for specific uses Three primary users of accounting informationare Internal users, External users, and Government

Internal users are executives and managers, employees,… They can use the accountinginformation to:

- Assess how management has discharged its responsibility for protecting andmanaging the company’s resources

- Shape decisions about when to borrow or invest company resources

- Shape decisions about expansion or downsizing

External users are suppliers, lenders, creditors, customers…they can use accountinginformation to answer their questions such as:

- Owners and prospective owners : Has the company earned satisfactory income on

its total investment? Should an investment be made in this company? Should thepresent investment be increased, decreased, or retained at the same level? Can thecompany install costly pollution control equipment and still be profitable?

- Creditors and lenders Should a loan be granted to the company? Will the

company be able to pay its debts as they become due?

- Employees and their unions : Does the company have the ability to pay increased

wages? Is the company financially able to provide long-term employment for itsworkforce?

- Customers: Does the company offer useful products at fair prices? Will the

company survive long enough to honor its product warranties?

- Governmental units: Is the company, such as a local public utility, charging a fair

rate for its services?

- General public : Is the company providing useful products and gainful

employment for citizens without causing serious environmental problems?

Government agencies that track and use taxes are interested in the financial story of abusiness They want to know whether the business is paying taxes according to current taxlaws

Accounting information is present in the form of financial statements:

- Balance Sheet: Summarizes the organization’s assets, liabilities and shareholder’s

equity for a specific moment in time

- Income Statement: Reports on a company’ income, expenses, and profits over a

period of time A profit and loss statement provides information on the operation

of the enterprise These include sales and various expenses incurred during statedperiod.

- Statement of Retained Earnings: Reports on the changes in equity of the company

during the stated period

- Cash Flow Statement: Reports on a company’ cash flow activities, particularly its

operating, investing and financing activities

The quality of accounting information is an important element when evaluating a firm

It can influence the cost of capital, both directly and indirectly The direct effect occursbecause higher quality disclosures affect the firm's assessed covariances with other firms' cashflows, which is nondiversifiable The indirect effect occurs because higher quality disclosuresaffect a firm's real decisions, which likely changes the firm's ratio of the expected future cashflows to the covariance of these cash flows with the sum of all the cash flows in the market(Richard Lambert, Christian Leuz, Robert E Verrecchia, 2007) In Bardos and Katsiaryna’sresearch (2011), they found out that there is a positive relationship between quality offinancial information and liquidity Liquidity can determine the attractiveness of a firm and itsstock in the market

C METHODOLOGY

Survey method

In order to reach these objectives, survey method using questionnaire like online surveywas conducted, which used correlational, descriptive, experimental and documentary analysis.Descriptive because its main concern is to get the overview of the characteristics of theproblems as well as its case study This study is also observational because we appliedreferences from observation Both quantitative and qualitative research shall be observed as itwill extract view and numerical data

The survey is conducted within 3 weeks from March 4 to March 25

Objectives of our survey are accountants, interns in accounting and students who havechances to get access to accounting The reason is that they have much knowledge aboutaccounting, accounting system and accounting information quality Moreover, in period ofindustry 4.0 when new technology is widely applied in accounting, students are consideredmore adaptable to use high-technology accounting methods and systems Most of them arestudents and postgraduate students in Foreign Trade University, a university with one of thelargest number of talented students in Vietnam Consequently, their recommendations andjudgements could be regarded to have high probability of reliability

We make a survey for 100 people; however, 80% of them are used to give the finalresults because 5% of answers are not completely finished and the rest are done by non-accounting-related people

D RESULT

I Research Process

We conducted a survey with a form answered online by the participants Each questionhas a number of options to answer, which is relevant to a number Then, we collect all thenumbers representing the respective effect of Information Scale, Technological Level,Automation of Technology, and Connectivity Level To be specific:

- The influence of Information Scale is represented by the number from 0 to 10implying to the extent of effect 0 means that there is no effect of Information Scale to thereliability of accounting information quality and 10 means the most effective respectively

- Technological Level’s effect results from accountants’ computer usage ability It isevaluated by the number from 0 to 10 with 0 relating to no effect of computer usingexperience and 10 relating to the most influence of capability using technology, especiallyaccounting software.

- The effect of Auto-Technology refers to the automation capacity of Industry 4.0’sinfluence with the number as the above, from zero to the most effect

- The influence of Connectivity Level relates to the effect of the capacity of connectivityamong computers in a firm, particularly in terms of accounting, and is presented by thenumber from 0 to 10 respectively meaning from the least to the most capacity of computerconnection’s effect

After collecting the result, we have some results:

Most of the people interviewed (9 out of 10) reckoned that Information Scale had mildeffect on the Reliability The conclusion does not violate reality because softwares andcomputers can handle calculation flawlessly, mistakes must be caused by human

60% of the participants thought technological level really affected the Reliability andthey chose number 8 to 10 for the answer, the rest 40% chose number 3 to 7 (28% for 3-5 and12% for 6 and 7)

The vast majority of the answers (roughly 90%) agreed that the more automatic thetechnology is, the more accurate the accounting They chose between number 8 and 10

The connectivity level seems to receive less consensus 30% of the participants said thatthe impact on accounting was not so notable and they chose between number 3 and 5 About40% chose number 6 and 7 and the rest chose 8, 9, 10 Accordingly, this factor, despitehaving positive influence on reliability, is not a key determinant

II Analysis

1 Computational power

This term refers to the ability to undertake or be used for computation; computingresources; specifically the ability of a computer to perform work, often considered in terms ofthe number of instructions that can be carried out in a given time, or with reference to theamount of random access memory present

Computer was one of the most crucial inventions of the twentieth century and it hasbeen empowered by a variety of innovations since then, including the Internet, big data andthe enhancement of computing ability

The Internet has been creating a far more convenient environment for accountants Byusing e-mail and social networks, they can discuss problems with colleagues and managers aswell as report accounting information quickly They can also get access to a tremendoussource of accounting tools by searching and downloading them, which help correct themistakes

Data volume growth is another key contributor to the improvement of informationaccuracy Being able to manage big data within a system can minimize errors caused byinconsistency The stages in upgrading computer’s materials, especially semi-conductors lead

to the higher speed in calculating The number of equations and the complexity of calculationare now no longer problematic within much stronger computational power

2 Data volume

Every day, a firm has to deal with thousands of transactions which acquire an accurateconcentration from the accountants Without the help of technology, the larger the data, thehigher probability the accountant could create some mistakes As a result, in accounting, thestep of correcting is considered one of the most important ones that could be made not only bynone but also by even five or ten correctors

However, the innovation of industry 4.0 has leaded the accountants to a brighter side ofaccounting without the need of mind recording and calculating Either a hundred or millions

of transactions could be easily journalised, added to a ledger and made into some statement toreport at the end of each period

The question is whether data volume influences the accounting information quality.Computer makes no wrong, especially using high technology of industry 4.0 Even thoughindustry 4.0 has created a far easier and more accurate accounting in the output information,the input may be the problems The reason is that inputs are mostly made by human.Transaction with money could be easily recorder, but others such as on account and discountnegotiation is not In these case, human is needed to decide how to record and journalize theseaccounts However, human is not always right and some mistakes could be happened

Conclusively, accounting information quality could be affected by the data volume.However, in terms of technological industry 4.0, data volume takes no effect on the quality ofthat because computer has the unlimited power to solve even a billion calculation each time

existing Internet infrastructure (Brown, Eric, 2016)

The term "the Internet of things" was coined by Kevin Ashton of Procter & Gamble,later MIT's Auto-ID Center, in 1999 "Things", in the IoT sense, can refer to a wide variety ofdevices such as heart monitoring implants, biochip transponders on farm animals, camerasstreaming live feeds of wild animals in coastal waters, automobiles with built-in sensors,DNA analysis devices for environmental/food/pathogen monitoring, or field operation devicesthat assist firefighters in search and rescue operations Legal scholars suggest regarding

"things" as an "inextricable mixture of hardware, software, data and service" (Ashton, K., 2009)

b The scale of IoT

Analyst Gartner calculates that around 8.4 billion IoT devices were in use in 2017, up

31 percent from 2016, and this will likely reach 20.4 billion by 2020 Total spending on IoTendpoints and services will reach almost $2tn in 2017, with two-thirds of those devices found

in China, North America and Western Europe, said Gartner Out of that 8.4 billion devices,more than half will be consumer products like smart TVs and smart speakers The most-usedenterprise IoT devices will be smart electric meters and commercial security cameras,according to Gartner

Table 1: IoT Units Installed Base by Category (Millions of Units)

For example, a smart transportation scenario might include sensing and analysis of acity’s current traffic flow, followed by control responses to adjust traffic stop lights orcongestion tolls In the case of remote control, human interaction may still be needed, but istypically limited to very specific actions The combination of remote sensing and actuation,along with advanced machine learning will lead to the development of autonomous machinesand intelligent systems, including robots

Figure 3: The IoT ecosystem: enablers and applications

Source: http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/ Date: 24/5/2016

d Low-Power Wide-Area Networks (LPWAN)

- Definition

A Low-Power Wide-Area Network (LPWAN) or Low-Power Wide-Area (LPWA)network or Low-Power Network (LPN) is a type of wireless telecommunication wide areanetwork designed to allow long range communications at a low bit rate among things

(connected objects) such as sensors operated on a battery (Schwartzman, Alejandro, and Chrisanto Leano, 2009)

- Characteristics of LPWAN

Low power: Operates on small, inexpensive batteries for years.

Wide area: Has an operating range that is typically more than km in urban settings: A

physical limitation to achieve low power and wide range is small data size Most LPWANtechnologies can only send less than 1000 bytes of data per day or less than 5000 bits per

second (Ferran Adelantado, 2017)

LPWAN is a crucial factor making IoT a reality

- Applications of LPWAN in industry 4.0

Dense locations: cities or big buildings for smart lighting, smart grid, and asset tracking Long term monitoring: sensors and meters to be installed and monitored over a long

period of time (e.g water metering, gas detectors, smart agriculture, and remote door locks).LPWAN technology works well in situations where devices need to send small dataover a wide area while maintaining battery life over many years This distinguishes LPWANfrom other wireless network protocols like Bluetooth, RFID, cellular M2M, and Zigbee,shown below with regards to bandwidth and range capability

Figure 4: Bandwidth and range capability of some devices

e Threats and benefits of IoT

- Threats:

Threat 1: Security and privacy

Threat 2: Data and complexity

Threat 3: Give the above concerns about security and complexity to persuadestakeholders to buy into the IoT can be difficult

- Benefits:

Benefit 1: Safety, comfort and efficiency

Benefit 2: Better decision making by analyzing larger trends from empirical data

Benefit 3: Create new revenue opportunities by realizing new business functions

(Jess Tourville, 2017)

3.2 Impacts of IoT on accounting information quality

In the accounting space IoT is still maturing, although it won’t be long till it catches up

to other more consumer-facing finance segments, like insurance Some of the ways the IoT islikely to impact accounting generally and accounting information quality include thefollowing:

a Dealing with more data

As the IoT brings in data from multiple sources, be it transactional data or data fromcloud ERPs and accounting platforms, there will be an even greater influx of available datawhich will need to be incorporated into reporting systems (Daniel Wyner, 2015)

The majority of the data will also be supplied in real-time displayed through intuitivedashboards that can help to greatly aid decision making and planning This wave of instantdata is likely to pave the way for more automation tools to help process and analyze data.With the help of automation tools and intensive data, accounting process could beshortened, especially the auditing process By making accounting less cumbersome, there will

be much fewer mistakes and accounting information quality will be highly advanced

b High connectivity among accounting data

As all data is connected within clients, managers, suppliers as well as customers, thepredictive value, feedback value and timeliness will all make a breakthrough in relevance of

accounting information This is the background of concise decisions to be made (Nick Chandi, 2017)

III Case study: Blockchain and distributed ledger technology (IBM)

1 Introduction:

1.1 IBM (International Business Machines Corporation) Australia Ltd.

IBM is an American multinational technology company headquartered in Armonk, NewYork, United States, with operations in over 170 countries The company originated in 1911

as the Computing-Tabulating-Recording Company (CTR) and was renamed "InternationalBusiness Machines" in 1924

IBM Australia is one of 177 branches that IBM serves worldwide (fortune.com, 2016) 1.2 Distributed ledger technology and blockchain

A blockchain, originally block chain, is a continuously growing list of records,

called blocks, which are linked and secured using cryptography (The Economist, 2015) Each

block typically contains a cryptographic hash of the previous block, a timestamp andtransaction data By design, a blockchain is inherently resistant to modification of the data It

is "an open, distributed ledger that can record transactions between two parties efficiently and

in a verifiable and permanent way" (Iansiti, Marco; Lakhani, Karim R., January 2017) For

use as a distributed ledger, a blockchain is typically managed by a peer-to-peer networkcollectively adhering to a protocol for validating new blocks Once recorded, the data in anygiven block cannot be altered retroactively without the alteration of all subsequent blocks,which requires collusion of the network majority