Radio Frequency Identification and How to Capitalize on It
What CPAs Should Know About RFID Technology

By P. Paul Lin and Kevin F. Brown

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JULY 2006 - Businesses must leverage information technology (IT) to improve their operations and create a competitive advantage. A dramatic shift toward mobility and real-time information is changing the way business data is collected. One IT tool that can meet the needs of both mobility and timeliness is radio frequency identification (RFID), a technology set to revolutionize business operations. RFID technology represents an efficient and versatile replacement for the barcode systems that have been a “best practice” for inventory and property identification.

Bar-code systems facilitate fast checkouts and effective inventory management, but the data processing is performed sequentially (one item at a time) and the device reading the bar code must be relatively close to the item (within sight of the tag). RFID, however, can concurrently identify up to 1,000 tagged items per second via wireless transmission. In the future, for example, the sale price of all the items in a shopper’s cart will be instantly totaled upon approaching a retail checkout counter, where a credit card receipt will be ready for the customer’s signature, the sale amount having already been charged to the RFID-enabled credit card in the customer’s wallet.

In 2003, the U.S. Department of Defense required its suppliers to use RFID tags on shipments to the military by January 2005. Wal-Mart also required its top 100 suppliers to have products on pallets or in cases employing RFID tags by 2005. The company required its next largest 100 suppliers to adopt this technology in 2006. With RFID, Wal-Mart hopes to improve its already-streamlined inventory management and boost sales by ensuring that the right products will be in the right place at the right time. According to BusinessWeek’s “Smart Web 50” report, Wal-Mart may generate pretax savings of as much as $8 billion by 2007. The RFID mandates required by the Defense Department, Wal-Mart, and other leading retailing firms have increased the demand of RFID tags significantly. In January 2006, IDTechEx predicted sales of 1.3 billion RFID tags this year, compared to about 600 million in 2005. IDTechEx also expects that by 2016 the number of tags delivered will be more than 450 times the number delivered in 2006 ( Meanwhile, competition and economies of scale have already pushed down the price of RFID tags (in October 2005, SmartCode announced that its EPC Gen 2 inlays are priced at $0.075 apiece for quantities of 1 million, and $0.072 apiece for orders exceeding 10 million). The tag price is now low enough for some companies to apply RFID to item-level applications.

Although the application of RFID started as early as World War II, when the Allies used it to identify airplanes, the application of the technology by businesses is still in its infancy. Nonetheless, leveraging RFID for automatic identification and data capture (AIDC) can provide significant benefits, including enhanced operations, reduced labor costs, increased inventory accuracy, and improved customer service.

RFID Systems

A typical RFID system consists of several components, including tags, printer/encoders, tag readers, RFID middleware (facilitating data exchange between readers and business information systems), a host computer system, and application software (Exhibit 1). With an Internet connection, the information can be accessed by authorized users at any time and place. An RFID tag is small enough to be attached to or embedded into almost any product. RFID tags are equipped with antennas to enable them to receive and respond to radio signals from RFID readers. RFID tags can be active or passive. Passive tags require no internal power source and can be very small; active tags have their own power supply, may have longer transmission ranges, and carry more data than passive tags. With either type, many tags can be read simultaneously instead of the sequential processing in a bar-code system. Because of the cost factor, the majority of RFID tags now in use are passive.

EPCglobal is the main organizational body working on the standardization of the electronic product code (EPC), which is widely used and accepted for RFID systems. The EPC Gen 2 RFID tags can operate globally in the United States, Europe, Japan, and Asia in the 860-to-960 MHz UHF band. A Gen 2 tag can have a memory size from a minimum of 96 to a maximum of 256 bits, and the tags can be read at a speed of about 1,000 per second. Even with the minimum 96 bits, the tag can accommodate the item-level tagging needs of any business. The total 96 bits are divided into four segments: Header (8 bits), EPC Manager (28 bits), Object Class (24 bits), and Serial Number (36 bits). The EPC Manager can accommodate up to 268 million companies, and the Object Class can represent up to 16 million object (product) classes. In addition, the Serial Number can represent up to 68 billion different items. The data representation capability of a Gen 2 tag is sufficient to provide unique identifiers for all items produced worldwide.

Problems with RFID Systems

Although RFID readers can theoretically read up to 1,000 tags per second, the environment can significantly affect data accuracy. For example, the reader cannot read a tag behind a can of soda because the aluminum and the contents of the can block the signal transmission. Kimberly-Clark discovered that it could improve accuracy by reading pallets as they rotate during the packaging process because it allows the reader to “see” the tags from different angles and obtain the best view. Consequently, readers must be properly installed and potential electromagnetic interference or barriers must be eliminated to ensure data accuracy. Other issues with RFID systems include reader collision, tag collision, signal disruption, system/data security, and consumer privacy.

Reader collision occurs when the signals from two or more readers overlap, which may result in two problems: signal interference, and multiple reading of the same tag. To avoid signal interference, readers must be carefully deployed to minimize the overlap in RF fields. Readers can also be programmed to read at fractionally different times, a technique called time division multiple access (TDMA). The same tag may still be read twice by overlapping readers. To cope with this problem, RFID systems must include an edit check to ensure an individual tag is not read more than once.

Tag collision occurs when a large volume of tags must be read in the same reading area and the reader cannot distinguish the signals simultaneously. Different systems have been invented to isolate individual tags, but the methods used may vary from vendor to vendor. For example, one way to solve the problem is to make the reader send a special signal (a “gap pulse”) when the reader recognizes that tag collision has taken place. Upon receiving this signal, each tag consults a random-number counter so that each determines a different interval to wait (in milliseconds) before sending its data.

Signal disruption. Because RFID systems use the electromagnetic spectrum to transmit signals, it is not difficult to jam the system with more-powerful signals at the same frequency.

Covert readers. Because tags can be read from a distance, covert readers can be used for corporate espionage or invasion of personal privacy. RFID vendors have been working on solutions, including blocker tags and tag “killing.”

Hidden tags. Because RFID tags can be very small and embedded into almost any product, people who buy or use those items or who carry the implanted tags may not know about RFID tracking. In November 2003, several organizations joined to publish the “RFID Position Statement of Consumer Privacy and Civil Liberties Organizations” and called for a delay of RFID implementation until privacy issues are addressed.

Before Jumping onto the RFID Bandwagon

A University of Arkansas research project, commissioned by Wal-Mart and released in October 2005, found that RFID technology does indeed improve business operations. The study analyzed out-of-stock merchandise at 12 pilot stores equipped with RFID technology and 12 stores without the technology. The results revealed a 16% reduction in out-of-stocks, due to RFID. Moreover, the out-of-stock items were replenished three times faster at the RFID stores than at their counterparts. Wal-Mart also experienced a meaningful reduction in manual orders, resulting in a reduction of excess inventory. Wal-Mart Chief Information Officer Linda Dillman said, “This study provides conclusive evidence that EPCs increase how often we put products in the hands of customers who want to buy them, making it a win for shoppers, suppliers, and retailers.”

Some companies have already jumped onto the RFID bandwagon, either to capture the competitive advantages of early adoption or because of a mandate by their customers (e.g., the Department of Defense, Wal-Mart, Target). According to a report by DiamondCluster International, however, many companies fear confronting the problems of adopting new technology: a brittle IT infrastructure, inflexible processes, and intractable business partners. Meanwhile, other companies anxiously await a proven system to avoid the mistakes made by early adopters. Accounting professionals should carefully evaluate the costs and benefits of an RFID project before adoption. Accounting firms may also want to take advantage of this new IT tool to develop a valuable niche in a new, sector-specific consulting service.

The most dramatic impact of RFID technology on business systems is the enormous volume of item-level data generated when firms embrace the new paradigm. In the past, the information about all items with the same bar code was maintained in one or two records, and the system used just a few attributes (e.g., quantity-on-hand, reorder point, selling price) to show the current status of the entire group. In an RFID platform, the unique serial number of every item is recorded, in addition to individual information such as vendor ID (if the same product has multiple vendors), purchase date, unit cost, and expiration date (if applicable). The demand for data-storage and data-processing power increases exponentially when a company has a sizable logistic infrastructure. In fact, the DiamondCluster report pointed out that the connectivity and infrastructure costs of an RFID project could account for more than 50% of its total costs. Such costs are necessary to build an IT infrastructure to be capable of storing and processing the huge amounts of information not previously captured or made available for analysis.

The deployment of RFID technology itself is not the ultimate goal. RFID technology should be treated as a means to improve business operations. Accounting professionals should consider whether a valuable niche exists for RFID technology within a particular organization (Exhibit 2), but they should not treat RFID as merely a powerful data-collection device during the process. Jim Reynolds, an IBM Global Services executive, pointed out that RFID represents an opportunity to improve business processes, which can save a company even more than simply streamlining its supply chain. Jeff Woods, a research analyst with the Gartner Group, also pointed out that the real returns from RFID will come when organizations create “RFID-centric” business processes.

Depending on their needs for RFID and their existing IT skill levels, companies can visit to find and research appropriate vendors. Companies can also do their homework by studying the information in the RFID Vendor Assessment offered by ABI Research ( The RFID Vendor Assessment studied nearly 150 companies in the industry sector, targeted at end-users. The profiles include the vendor’s background information, sales data, product portfolio summaries, and a future product roadmap analysis. The report was released in early 2005, and readers should beware that things can change very quickly in any emerging IT sector.

Another survey (Laurie Sullivan, “Skill Shortage Slowing
RFID Adoption,” revealed that 75% of business professionals think there is an insufficient skilled workforce to implement RFID technology. Companies are advised to use care when selecting partners for RFID deployment. Nonetheless, the future looks promising for those with expertise in this paradigm-shifting technology.

Opportunities for Auditors

Because RFID may soon revolutionize inventory production and management, auditors will need to be well versed in this new technology. While RFID offers companies the opportunity for much stronger internal control over their inventory, auditors, both internal and external, will need to understand how this technology is deployed in order to properly assess control risk and to audit internal controls, in not only the production cycle but the revenue cycle as well.

For example, auditors will need to know how and where tags are attached and programmed. Tag control in RFID systems is critical. Auditors will need to understand how the system identifies authentic tags and prevents duplicate tags. Furthermore, controls must ensure that tags identify the correct products. Auditors should consider if tags can be changed, and how unauthorized changes are prevented.

These are just a few of the many considerations necessary to evaluate controls for RFID systems. While RFID offers enormous benefits, weak controls over these systems will heighten audit risk dramatically.

In addition to the impact on auditors’ evaluation of internal controls, RFID may change how auditors substantiate inventory. These systems may allow auditors to perform more-efficient test counts of inventory during their observation of physical counts performed by clients. Unscheduled inventory observations could include extensive test counts of inventory using RFID readers, which would not disrupt a company’s operations. Sophisticated RFID systems with the potential for tracking every inventory item with a unique identifier, as it is purchased, manufactured, and sold, may even reduce audit risk enough to significantly curtail or even eliminate an auditor’s observation of physical counts.

P. Paul Lin, PhD, is an associate professor of accountancy, and Kevin F. Brown, PhD, CPA, is an assistant professor of accountancy, both at the Raj Soin College of Business of Wright State University, Dayton, Ohio.




















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