Date posted: 3/02/2017

Xero founder Rod Drury on AI and the future of accounting

Xero founder Rod Drury on why the future of the accounting profession will be driven by artificial intelligence

In brief

  • All the social issues of New Zealand are fixed by small businesses creating more jobs
  • Some businesses are happy to keep doing their own thing but technology is changing the world. If they won’t change, then their businesses will be worth less when they go to get out
  • If you are an accountant and you don’t have a cloud strategy then you’d better hurry up. Young firms will go in, market and grab those customers

Photography by Alistair Guthrie

There’s never been more opportunity. It’s the golden age of services business,” says Xero founder and CEO Rod Drury.

From his position at the head of a fast-growing cloud technology company – Xero reported revenue growth of 48 per cent to NZ$137m in the six months to September 2016 – Drury is understandably optimistic.

His accounting software has processed more than NZ$1 trillion in transactions over the previous year, Xero has around 900,000 client businesses and 20 global offices.

Drury’s experience of the meeting point of accounting, technology and small business leads him to believe accounting is at an “inflection point” and the future will be driven by artificial intelligence (AI).

End of the beginning

Within the accounting profession there has been considerable debate about the impact of technology and the potential for companies like Xero to cut the accountant’s traditional lunch. But the impact of accounting software should be viewed as a positive opportunity, Drury, perhaps unsurprisingly, says.

“We will invest NZ$300m this year in technology for accountants and small business. Wouldn’t you want to be riding the back of that?

“We are going to do everything we can to reduce low value accounting work to free up time for people to drive growth strategies for their business customers. And we are unapologetic about that.”

To Drury, anything that helps small businesses thrive is positive because it is small businesses – which employ 26 per cent of New Zealand’s workforce and 44 per cent of Australia’s workforce – that drive national economic prosperity. Software that frees accountants up to focus on small business development therefore contributes directly to that prosperity, he says.

“That’s how you get better schools and hospitals. That’s how you deal with youth [un]employment. All the social issues of New Zealand are fixed by small businesses creating more jobs. And I think that’s what accountants should be doing – growing small businesses and growing their own businesses.”

Tech books

A Xero survey released in November 2016 found 83 per cent of chartered accountants believe understanding technology is as important to their job as understanding accountancy. It also found 71 per cent think knowledge of automation in the financial sector will be crucial to their success over the next five years.

For Drury, one of the key developments accountants need to get their heads around is artificial intelligence and machine learning.

The modern computing power available through large global software service providers can interrogate huge amounts of data to draw out insights that, in turn, help computers manage data better, he says.

“We have just been doing a massive technical move onto the Amazon web services platform. This allows us to start adding non-transactional data services to that massive amount of data we have. We are focusing now on machine learning and AI.”

One of the insights Xero has had – unlikely to surprise accountants – is that small business “are terrible” at coding transactions, Drury says.

AI allows the software to understand the types of coding mistakes business owners make and can correct them automatically, he says.

If you are building a cannabis smuggling operation you are probably not going to record all your transactions in cloud accounting software.

“Already we are finding that because accounting is a fairly low vocabulary, tight domain we are getting extraordinary results from basic machine learning. So much so that we think over the next few years we can get rid of coding. Small businesses won’t need to code transactions anymore.”

After analysing more than three million transactions – and correcting the data that had already been collected – Drury says Xero is nearly in a position to offer automatic coding.

“It’s like looking for patterns. We have such a large amount of data we know how people code things right and how they code them wrong. We believe now we can get rid of coding. Take bank transactions which come in in the morning. We know how people are going to code things and we can apply machine learning over that. We found that we can code nine out of ten of those transactions automatically.”

Aggregating large amounts of data can lead to “phenomenally cool” things, Drury says.

“Like first of all actually realising there are many more small business than what the [New Zealand] government thought. The official number is about 450,000. We know we can see 680,000 trading entities.

“We know 20 per cent of small businesses are multi-banked. We can see underlying trends around profitability, days to get paid and those types of insights.”

Accountant oversight

In Drury’s brave new world, the accountant’s role becomes one of quality control and certification of the automatic accounting processes, rather than that of number cruncher.

“The professional comes in to monitor and fix so that the quality of everybody’s books is really good.”

And when your online books are accurate you can review your financial data and react in real time. You can even share that data with interested third-parties such as banks or shareholders, he says.

“This is high integrity accounting software. You can see who has been into the system, which bank feeds are automatic and haven’t been touched by human hand, were there any manual transactions added or deleted right down to common bits of fraud like suppliers with the same bank account number.

“We have baked internal controls into the system. We are seeing better books and the integrity of the financial information can be proven to be better because of the tools we have built.

“We love the concept of continuous certification. If you can see a high integrity system and the accountant understands the controls and they are happy to sign off these books – I have an envelope around this customer so I will be told if they fly out of the ratios, I know the cash is right - it makes the accountant more relevant on a monthly basis. The CA is happy to be part of the business line between a client and the bank. They can continuously certify.”

Tech in practice

Drury sees an opportunity to bring the good reputation of chartered accountants into the “lending equation” for small businesses through certifying real time financial data.

“The number one problem for small business is access to capital and debt. This is opening up the small business market as a lending source. If we can get capital in, and lower the banks’ risk, that makes sense. [Continuous certification] allows accountants to be part of these debt and capital raising equations, which directly gases up small business.”

He also sees an opportunity to give stakeholders such as investors “read only” access to accounts.

“If investors can log in and see what is going on, to see expenses are being managed, they can see what your cash flow is doing, what your deals are doing, if people are flying business class around the world… all that sort of stuff is open. That makes it much easier for investors to trust you.

“And if things are going wrong, they can say let’s look at changing strategies before the money runs out. So there are no surprises.”

Privacy

Drury’s bullish views on accounting software continue in the realm of privacy. “There is no doubt that cloud systems are more secure than desktop systems. You will go into a factory and they have got a yellow sticky with the admin password sitting right next to the monitor, right?”

But cloud-based accounting can provide an opportunity for the growth of a government “surveillance culture”. Drury says a balance between private and public interests must be struck.

“We don’t want the government to come fishing and looking for data. We are proactive on that with the government and with the privacy commissioner.”

But discussing the controversy that erupted over US police seeking access to iPhone data in 2016, he acknowledges there will be circumstances when a software provider or server owner should cooperate with government enquiries.

“If your daughter has been kidnapped and information to get to the kidnapper is on a phone, do you want that phone broken open. Absolutely?

“Do people want their own privacy? Of course they do. It’s a really hard one and there needs to be a conversation about that.”

But he argues that for small business accounting the issue is not that controversial.

“If you are building a cannabis smuggling operation you are probably not going to record all your transactions in cloud accounting software.

“For the government to get data without informing our customers has only happened a handful of times [in ten years]. We believe that if a government department wants our customers’ data they must go through due process and our customer must be informed. We have spent quite a bit of money defending our customers’ right to be informed. But there have been a very small number of occasions where the legal framework means they can get our customers’ data without informing them.

“We are not SkyNet yet,” he says, referring to the computer system that went rogue in the movie Terminator.

Change to thrive

“Some businesses are happy to keep doing their own thing but technology is changing the world. If they won’t change, then their businesses will be worth less when they go to get out. If you are an accountant and you don’t have a cloud strategy then you’d better hurry up. Young firms will go in, market and grab those customers.”

“There is no doubt end customers want this. When they see it they want to work this way. This stuff is way past the tipping point,” says Drury.

This article was first published in the Feb/Mar 2017 issue of Acuity magazine.

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