Unit 3
Recent Trends in Accounting
Forensic accounting utilizes accounting, auditing, and investigative skills to conduct an examination into the finances of an individual or business. Forensic accounting provides an accounting analysis suitable to be used in legal proceedings. Forensic accountants are trained to look beyond the numbers and deal with the business reality of a situation. Forensic accounting is frequently used in fraud and embezzlement cases to explain the nature of a financial crime in court.
What Forensic Accountants Do
Forensic accountants examine data to determine where missing money has gone and how to recover it. They may also present reports of their financial findings as evidence during hearings, where they often testify as expert witnesses. This work serves an important purpose at public accounting and consulting firms, law firms, law enforcement agencies, and insurance companies.
The role a forensic accountant plays in each of these settings varies. Each firm deals with money in different ways, and scammers target organizations based on their duties. Some accountants work on a broader fraud case, such as those working at law enforcement agencies or law firms. Accountants working in more specific fields, such as public accounting or insurance, typically focus on specific types of fraud, such as insurance fraud. Forensic accountants working at some agencies are more likely to testify in court.
Because a forensic accountant's job is crucial for financial security and safety, the position requires certain competencies. The next section discusses the skills and prerequisites a forensic accountant needs, as well as how they apply to different cases.
Forensic Accounting Audit Procedures
A forensic accounting audit requires a different type of handling than a financial statement audit. Each situation requires a unique protocol. This process involves an initial investigation, information reporting, and a final litigation. The information below explores forensic accounting investigations and speaks to the importance of a forensic accountant's specialized skills while conducting research to make a claim.
1. Investigation
Forensic accountants typically begin an investigation and collect evidence when fraud suspicions already exist. Because of this, the data they look for when conducting an investigation include red flags and discrepancies that might indicate fraud has taken place. They may interview staff at an organization to gain more information and attempt to find the individual behind the fraud. Using the gathered information, they begin to form a hypothesis as to what happened and create follow-up plans to continue to assess the business. Once this step reaches completion, the forensic accountant determines the next necessary action and relays this information to the company.
2. Reporting
Once forensic accounting professionals gather information/data and develop a case, they present a summary of their findings to necessary personnel. Using this information, these workers determine how the fraud occurred and who played a role. Then, the accountant determines how to handle the case and suggests steps the company should take next. In addition, they may recommend ways to prevent these incidents in the future by increasing/strengthening internal security and pointing out red flags. After submitting their report, the forensic accountant prepares for their role in court proceedings related to the case.
3. Litigation
The final step of a forensic accountant's process involves participation as an expert witness in the incident's court case. The professional presents their findings as evidence in court and testifies against the offenders. They explain any evidence and interpret financial documents in understandable terms, presenting how they identified the subject. This means that the accountant must not only find evidence but also use rhetoric that makes sense to the court. Once this step reaches completion, the court determines the final decision for the situation. The forensic accountant plays an important role throughout this process.
In India, it is mandatory to undertake social welfare activities by Indian companies. Because the government of India imposed a regulation in this respect this made the companies undertake social welfare projects on mandatory basis but it is important to note that merely imposing the rules on CSR will not yield the good results so along with creating responsibility on the firms it is necessary to have comprehensive accountability through various systems such as accounting and reporting aspects.
The Corporate Social Responsibility and Sustainable development are interrelated concepts and which creates good reputations to the organisations involved in undertaking such projects voluntarily as well as the part of legal compliance (Dawkins, 2004). The companies Act 2013 is provided certain guidelines on reporting of CSR initiatives but it is necessary to have the standard which is acceptable at the global level. These guidelines apply only to Indian context and which are not recognizable at the international market because there are unique guidelines and standards which are applicable for reporting the CSR initiatives by the companies at the global level, for instance, GRI (Global Reporting Initiatives) sustainability reporting standards for reporting the non-financial performance-related information. Non-financial performances are also called as social performances of the companies. It is important to note that GRI SRs are the unique global level standards developed for reporting the social performance-related information and this will help the companies to recognize at the international level and also enables the firms to attract the global investors thereby Indian companies can grow globally. The rapid growth of CSR initiatives in the Indian scenario is indicating the positive sustainable developmental reform in the country (Jain and Winner, 2016). The disclosure of corporate social responsibility and sustainable development initiatives are an important aspect to any organisations and which are the strategies they use to establish the relationship with their stakeholders by meeting their expectations as the responsible business organisation through the communication of information on CSR and sustainable developmental initiatives (Kim and Rader, 2010). Communication of CSR and sustainability initiative information by the companies along with communication of financial performance is the best practice to get the confidence from their stakeholders (Sutantoputra, 2009). As already discussed, promoting and facilitating CSR and Sustainability initiatives disclosures, various numbers of reporting standards have been developed and which can be adopted by the companies to accounting and disclosing their social, economic, and environmental impacts on the business and economic environment in which they are currently operating. Some researchers such as Chow and Chen, 2012; Moreno and Capriott,2009; opined that many companies of the globe are not effectively disclosing the information on CSR and sustainability initiatives related information to their stakeholders and they also missing the chance to build good relationship among them. It can be observed from some studies conducted by Gill et al., 2008; Perez-Batres et al., 2010; that CSR reporting remained underdeveloped and still in infancy stage in various emerging and developing countries specifically in the Asian region.
Accounting for CSR and Sustainable Spending by the Companies in India There is a legal and mandatory requirement to undertake CSR and sustainable projects by the companies in India. This creates the responsibility on the companies but not accountability so, to bring transparency in the CSR expenditure made by the companies which come within the ambit of section 135 of the companies Act 2013, the ICAI issued guidance note on accounting for expenditure for CSR activities. This assists with the accounting of the expenditure on CSR activities and brings more accountability. Generally, the expenditure on CSR activity is to be debited to the statement of profit and loss and extra provision is made for the expenses to be incurred. There are some exceptional cases where the accounting treatment will be different. The Accounting Method for CSR and Sustainable Spending by the Companies in India in the Companies Bill, 2013 there are a list of CSR activities under Schedule VII and accounting for the same are:
Contribution to Fund For any contribution made to a fund specified in Schedule VII, the same is treated as an expense for the year and debited to the statement of profit and loss.
Expenditure Incurred by a Company itself on the CSR Activities In this case, the company needs to analyse the nature of the expenditure by keeping in view the ‘Framework for preparation and presentation of financial statements' issued by the ICAI. The revenue expenditure is charged as an expense for the year to the profit and loss account and the capital expenditure which gives rise to an asset is treated differently by assessing it whether it has control over the asset and earn future economic benefit from it. If the control of the asset is transferred by the company, then the same is not recognised as an asset in the books and such expenditure is charged to profit and loss account. In the other way round, if the control of the asset is retained by the company itself then it is further assessed whether it earns future economic benefits. But there will be no future economic benefits from a CSR asset in the form of any surplus and it further cannot be included in business profits as per rule 6(2) of the Companies Act 2013.
Expenditure through Trust, Society etc. A company can do its CSR activities through a registered trust, or a society, or a company established under section 8 of the Act. The expenditure incurred in this case is also treated as an expense for the year and charged to the statement of profit and loss.
Grants Received from Others the CSR expenditure is measured net of the grant if a company receives a grant from others for carrying out CSR activities.
Goods Manufactured and Services Rendered If company supplies goods manufactured by it or renders service as CSR activities, the expenditure is recognized when the control of the goods is transferred or allowable services are rendered by the employees of the company.
Accounting Treatment of Income Earned from CSR Projects while Undertaking CSR Activities When the companies are undertaking CSR activities or programmes then it is necessary to determine whether any surplus created from the activity or not. If there is a surplus then it should not be the part of the profit of the business of the company. Since the surplus from the CSR activities is not related to direct business then it does not form the part of the surplus of the business so it should be considered as the liability of the business. Hence it should be the charge to the statement of profit or loss of the company. It is noted that the surplus amount of CSR activities should not consider while calculating 2% of the amount to be spent.
Accounting for the Shortage of Funds when the Company Spends Excess for CSR When the company is not in a position to spend the specified amount for CSR then it has to disclose the reasons for the same. In some cases, the company is having a shortage of funds to spend money for CSR then it is not allowed to make the provisions for the same. But for the contractual liability’s companies are allowed to make the provisions. In some specific cases if the company spent more than the prescribed limit that is 2% of net profit then the excess amount spent is cannot be carried forward to the future years. The guidance note on accounting for CSR initiatives by Indian companies are for maintaining the uniformity and transparency in CSR reporting in India. Uniformity can be achieved in the Indian context only. To achieve harmonisation at the international level it is necessary to move forward to adopt international social reporting standards issued by IIRC (International Integrated Reporting Council), GRI (Global Reporting Initiatives) etc., if the companies follow these standards absolutely it will be benefits to both companies and other various stakeholders because it helps to bring uniformity in CSR reporting in global context. So, the present paper is intended to analyse the accounting pattern and perception of various stakeholders on the method of accounting and other aspects recognition, measurement and disclosure of CSR information by the selected Indian companies.
A derivative is generally a contract between two or more parties to hedge or to control the risk of the underlying asset whose value depends upon the future market price of the underlying asset, which includes the instruments like future, options, forward contracts, swaps etc. and accounting for derivatives is done at the end of the year to record the change in the value of the underlying asset.
Accounting for derivatives is a balance sheet item in which the derivatives held by a company are shown in the financial statement in a method approved either by GAAP or IAAB or both.
Changes in the value of the currency increase the risk for the dealers, or rapid changes in the stock market price increases the risk of investment. Hence the derivative contract is developed to control the risk of the underlying asset. For example, dealer, A of India has to pay $ 50,000 after 3 months to dealer B of the USA for goods purchased. As there are rapid changes in the market due to which the value fluctuates every day, Dealer A will enter into forward contract with the Bank for payment to pay at the rate decided irrespective of the dollar’s market price. A forward contract is a type of derivative. So, if there is a change with the dollar’s market price and agreed price between bank and dealer, the bank will record gain or loss in accounts as at the end of the financial year or end of the period of the contract, whichever is earlier.
Rules for Accounting Derivatives
Accounting of derivatives is based upon the purpose for which it is used as it can be used for speculation, i.e., to earn profit from derivatives transactions and hedging, i.e., to control the risk of future contracts. Suppose there is speculation loss that is to be recognized immediately in the accounts. Some of the rules for accounting of derivatives are as under:
- Initially, derivatives are to be recorded at fair value.
- Re-measurement of fair value is to be done at the end of the financial year or at the end of the contract period, whichever falls earlier.
- The purpose of the derivative is to be determined at the time of entering so as to decide whether it is speculation or hedging.
- Any transaction cost for entering into derivatives is to be charged to the profit and loss account immediately.
- If the derivative is of speculation in nature, the loss or profit is to be immediately recognized in the profit and loss account.
If the derivative is non-speculative, the loss or gain is to be transferred to a comprehensive income account.
Advantages
The advantages of accounting for derivatives are defined and provided as under-
- The gain or loss on the derivative transaction is recorded as per the matching principle and as per the revenue recognition concept.
- Speculation or chance of fraud can be avoided with accounting for derivatives.
- Profits and loss can be adjusted against each other in the case of derivatives transactions.
- Speculative loss is recognized immediately to discourage unauthorized speculations.
- On acquisition, derivatives are to be immediately recognized as asset or liabilities, which reflects the true and fair view of in the accounts.
- Temporary changes in the derivative’s fair value in the case of non-speculative transactions are to be recorded in the comprehensive income account.
Disadvantages
Downsides of Accounting for derivatives are explained as under-
- As derivatives are volatile in nature hence the risk is high.
- As the gain or losses on the speculative transactions are to be recorded immediately, it may result in an initial loss at the balance sheet date and subsequent gain at the end of the contract period or vice versa, which creates complexity in the accounts.
- There are chances of fraud in the case of over-the-counter transactions.
Artificial Intelligence is a broad name for computers solving problems on their own. Such computers are often based on neural networks. Neural networks resemble the structure of the human brain and can reorganize themselves for better accuracy and efficiency. This way, we try to build a real computer brain that will solve problems faster and more efficiently than human beings.
Multi-layer neural networks enable Deep learning when problems are analysed on more and more abstract levels. It means that computers can not only analyse data but also conclude in an almost human-like way.
Machine Learning involves computers that can recognize patterns in data and learn from them. There are two types of ML.
Unsupervised and Supervised Machine Learning.
In unsupervised ML you feed your computer with data, ask questions, and wait for data analysis and results. For supervised ML you add one more step when you give the computer additional knowledge. For example, you indicate that this batch of documents is fraudulent, and the other one is clear. Then, in the process of Machine learning the computer looks for patterns to distinguish one kind from another.
These technologies are trained to interact with the outer world as well. Natural Language Processing (NLP) provides computers with the ability to understand and interpret human language, written or spoken. How difficult a task it is, you can tell by observing children who learn to speak. To teach computers to look at things like humans, we use Computer vision so that they could analyse images and conclude. Nowadays, documents, videos, and images can be analysed by AI as well.
All these technologies are parts of Artificial Intelligence, and they can be used for commercial purposes. They’re used in scientific research too, but HR, FinTech, or assurance businesses know how to benefit from the newest technologies as well. Now, let’s look at how we can use AI and machine learning in accounting.
Examples of Artificial Intelligence in Accounting
We’ll start with general ideas on how AI can be used in accounting. Then we’ll move on to real-life examples of AI and ML applications. Here you’ll find 7 fields to use AI. However, it isn’t a complete list of challenges that AI can help to solve.
- Frauds - computers can support fraud detection and prevention by analysing patterns and monitoring every document within the company. They can check for accordance with accounting rules and laws. AI may then flag all the issues for humans to double-check.
- Hidden insights - in general, AI is capable of discovering hidden patterns, trends, and insights giving your company a business advantage over your competitors. The insights are also better and can be delivered on time to make quick and data-based decisions.
- Better forecasts - forecasts help plan strategical operations. Having better and deeper insights combined with Machine Learning algorithms creates an opportunity for better and more reliable forecasts. Knowing what will probably happen is invaluable.
- Data input automation - multitude of accounting employees work on data input and review. However, AI can read, analyse, and process all the documentation. And it won’t make a mistake. Even more, it can ask for data completion, if needed or flag issues for further inspection.
- Due date - This issue falls in between accounting and marketing. AI can help establish invoice due time individually for every contractor and identify those who have problems paying on time.
- Close procedure - AI can support or even replace humans in monthly or quarterly close procedures. It could even simultaneously prepare the close procedure throughout the period.
- Better audits - AI can audit 100% of a company’s documents instead of checking just a sample as humans do. It makes audits more accurate and efficient. Imagine knowing not statistically, but exactly, what happens in your company.
- Risk assessment - AI benefits from quick access to all the possible data and sophisticated predicting models. Based on what AI has learned from people, it’ll enhance risk identification and prevention.
The Benefits of AI
AI’s ability to easily extract data is undeniably convenient for accountants. But it also adds significant value that goes beyond convenience.
A solid AI program adds efficiency to the accountant role. This spares the accountant from having to conduct activities such as gathering data for audits or analysing organizational expenses. These actions tend to take up a lot of time and energy, which could take time away from other important duties like strategic financial development and maintaining regulatory compliance.
Integrating AI into accounting can also increase accuracy and reduce human error. This can further streamline the accounting process, as minimizing mistakes naturally translates into less time having to discover, track down and correct errors. From a big-picture standpoint, this can also potentially make a business less subject to large-scale accounting issues like missed payments or tax penalties.
Another benefit of AI in accounting is the ability to reduce the risk of fraud. Because artificial intelligence can audit every document related to finance, it can detect irregularities and alert accountants to their presence. While this can stop small, honest mistakes from transforming into much larger issues, it can also bring attention to large-scale suspicious behaviour in a rapid manner.
AI and Accounting
Although AI is useful in nearly every area of business, it has proven truly revolutionary in the accounting arena. Instead of spending days combing through columns of numbers, accountants can now extract the information they need with the click of a button. Not only is this a massive time saver, but it also provides more targeted data.
Data is a foundational element in AI and accounting. AI’s capacity to gather, organize, analyse and interpret numerical information can make it a valuable tool for an accountant. When its capacity is utilized fully and properly, artificial intelligence in accounting makes it possible for a company to build a more holistic accounting strategy, one that can be built on more efficient bookkeeping and financial accessibility.
Ultimately, regarding AI as an accounting tool is an important distinction for an accountant to make. AI isn’t meant to integrate with an accounting department to squeeze out the human element involved in a company’s financial oversight. It’s meant to enhance a department’s ability to provide the most accurate financial information possible. This makes AI something not to fear, but instead, embrace. Besides, no matter how sophisticated or fast an AI-based algorithm gets, there is still no replacement for the human element when it comes to applying information derived from data into a real-world financial strategy.
What Can AI Do?
To fully appreciate AI’s growing application as a viable business tool, it’s important to understand what AI can do. Its capabilities can be embraced in the business world because they point to the creation and development of a more efficient corporate community.
For example, artificial intelligence programs do more than perform advanced mathematical calculations — they read and write, too. AI programs can leverage their ability to parse news articles, emails, weblinks and legal documents to choose and present the most salient parts to comprehend. This same ability can be used to gather and analyse information to produce written content that can accurately summarize data.
AI also offers the opportunity to extend the senses, which can have numerous business applications. For instance, AI’s ability to deploy machine vision can allow it to make informed decisions that can have a positive impact on quality control and other supply chain elements that are important to business efficiency. AI-based programs built to pick up and interpret sounds can help busy professionals automate meeting minutes. Speech-based AI can make it possible for businesses to schedule key appointments and complete phone-based tasks without the need to allocate an employee’s time to do so.
While some of AI’s capabilities do indeed involve autonomous machines, these devices aren’t poised to take over the world. Devices like drones and robots can be used to handle rudimentary tasks at efficient speed, which can then free up individuals to do more advanced tasks. This extra time can allow individuals to have greater personal bandwidth, which could ultimately lead to more robust professional growth.
References:
- Lal Jawahar and Seema Sriwastava, Financial Accounting, Himalaya Publishing House
- Monga, J.R, Financial Accounting: Concepts and Application Mayoor Paper Backs, New Delhi.
- Shukla M.C, T.S. Grewal and S.C. Gupta. Advanced Accounts. Vol-1, S. Chand & Co.
- Maheshwari S.N, Financial Accounting Vikas Publishing House, New Delhi
- Jain S.P. And K.L. Narang Financial Accounting Kalyani Publishers New Delhi
- Bhushan Kumar Goyal and, HN Tiwari, Financial Accounting, Vikas Publishing House, New Delhi
- P.C. Tulsian, Financial Accounting, Tata McGraw Hill, New Delhi
- Compendium of Statements and Standards of Accounting, ICAI, New Delhi
Unit 3
Recent Trends in Accounting
Forensic accounting utilizes accounting, auditing, and investigative skills to conduct an examination into the finances of an individual or business. Forensic accounting provides an accounting analysis suitable to be used in legal proceedings. Forensic accountants are trained to look beyond the numbers and deal with the business reality of a situation. Forensic accounting is frequently used in fraud and embezzlement cases to explain the nature of a financial crime in court.
What Forensic Accountants Do
Forensic accountants examine data to determine where missing money has gone and how to recover it. They may also present reports of their financial findings as evidence during hearings, where they often testify as expert witnesses. This work serves an important purpose at public accounting and consulting firms, law firms, law enforcement agencies, and insurance companies.
The role a forensic accountant plays in each of these settings varies. Each firm deals with money in different ways, and scammers target organizations based on their duties. Some accountants work on a broader fraud case, such as those working at law enforcement agencies or law firms. Accountants working in more specific fields, such as public accounting or insurance, typically focus on specific types of fraud, such as insurance fraud. Forensic accountants working at some agencies are more likely to testify in court.
Because a forensic accountant's job is crucial for financial security and safety, the position requires certain competencies. The next section discusses the skills and prerequisites a forensic accountant needs, as well as how they apply to different cases.
Forensic Accounting Audit Procedures
A forensic accounting audit requires a different type of handling than a financial statement audit. Each situation requires a unique protocol. This process involves an initial investigation, information reporting, and a final litigation. The information below explores forensic accounting investigations and speaks to the importance of a forensic accountant's specialized skills while conducting research to make a claim.
1. Investigation
Forensic accountants typically begin an investigation and collect evidence when fraud suspicions already exist. Because of this, the data they look for when conducting an investigation include red flags and discrepancies that might indicate fraud has taken place. They may interview staff at an organization to gain more information and attempt to find the individual behind the fraud. Using the gathered information, they begin to form a hypothesis as to what happened and create follow-up plans to continue to assess the business. Once this step reaches completion, the forensic accountant determines the next necessary action and relays this information to the company.
2. Reporting
Once forensic accounting professionals gather information/data and develop a case, they present a summary of their findings to necessary personnel. Using this information, these workers determine how the fraud occurred and who played a role. Then, the accountant determines how to handle the case and suggests steps the company should take next. In addition, they may recommend ways to prevent these incidents in the future by increasing/strengthening internal security and pointing out red flags. After submitting their report, the forensic accountant prepares for their role in court proceedings related to the case.
3. Litigation
The final step of a forensic accountant's process involves participation as an expert witness in the incident's court case. The professional presents their findings as evidence in court and testifies against the offenders. They explain any evidence and interpret financial documents in understandable terms, presenting how they identified the subject. This means that the accountant must not only find evidence but also use rhetoric that makes sense to the court. Once this step reaches completion, the court determines the final decision for the situation. The forensic accountant plays an important role throughout this process.
In India, it is mandatory to undertake social welfare activities by Indian companies. Because the government of India imposed a regulation in this respect this made the companies undertake social welfare projects on mandatory basis but it is important to note that merely imposing the rules on CSR will not yield the good results so along with creating responsibility on the firms it is necessary to have comprehensive accountability through various systems such as accounting and reporting aspects.
The Corporate Social Responsibility and Sustainable development are interrelated concepts and which creates good reputations to the organisations involved in undertaking such projects voluntarily as well as the part of legal compliance (Dawkins, 2004). The companies Act 2013 is provided certain guidelines on reporting of CSR initiatives but it is necessary to have the standard which is acceptable at the global level. These guidelines apply only to Indian context and which are not recognizable at the international market because there are unique guidelines and standards which are applicable for reporting the CSR initiatives by the companies at the global level, for instance, GRI (Global Reporting Initiatives) sustainability reporting standards for reporting the non-financial performance-related information. Non-financial performances are also called as social performances of the companies. It is important to note that GRI SRs are the unique global level standards developed for reporting the social performance-related information and this will help the companies to recognize at the international level and also enables the firms to attract the global investors thereby Indian companies can grow globally. The rapid growth of CSR initiatives in the Indian scenario is indicating the positive sustainable developmental reform in the country (Jain and Winner, 2016). The disclosure of corporate social responsibility and sustainable development initiatives are an important aspect to any organisations and which are the strategies they use to establish the relationship with their stakeholders by meeting their expectations as the responsible business organisation through the communication of information on CSR and sustainable developmental initiatives (Kim and Rader, 2010). Communication of CSR and sustainability initiative information by the companies along with communication of financial performance is the best practice to get the confidence from their stakeholders (Sutantoputra, 2009). As already discussed, promoting and facilitating CSR and Sustainability initiatives disclosures, various numbers of reporting standards have been developed and which can be adopted by the companies to accounting and disclosing their social, economic, and environmental impacts on the business and economic environment in which they are currently operating. Some researchers such as Chow and Chen, 2012; Moreno and Capriott,2009; opined that many companies of the globe are not effectively disclosing the information on CSR and sustainability initiatives related information to their stakeholders and they also missing the chance to build good relationship among them. It can be observed from some studies conducted by Gill et al., 2008; Perez-Batres et al., 2010; that CSR reporting remained underdeveloped and still in infancy stage in various emerging and developing countries specifically in the Asian region.
Accounting for CSR and Sustainable Spending by the Companies in India There is a legal and mandatory requirement to undertake CSR and sustainable projects by the companies in India. This creates the responsibility on the companies but not accountability so, to bring transparency in the CSR expenditure made by the companies which come within the ambit of section 135 of the companies Act 2013, the ICAI issued guidance note on accounting for expenditure for CSR activities. This assists with the accounting of the expenditure on CSR activities and brings more accountability. Generally, the expenditure on CSR activity is to be debited to the statement of profit and loss and extra provision is made for the expenses to be incurred. There are some exceptional cases where the accounting treatment will be different. The Accounting Method for CSR and Sustainable Spending by the Companies in India in the Companies Bill, 2013 there are a list of CSR activities under Schedule VII and accounting for the same are:
Contribution to Fund For any contribution made to a fund specified in Schedule VII, the same is treated as an expense for the year and debited to the statement of profit and loss.
Expenditure Incurred by a Company itself on the CSR Activities In this case, the company needs to analyse the nature of the expenditure by keeping in view the ‘Framework for preparation and presentation of financial statements' issued by the ICAI. The revenue expenditure is charged as an expense for the year to the profit and loss account and the capital expenditure which gives rise to an asset is treated differently by assessing it whether it has control over the asset and earn future economic benefit from it. If the control of the asset is transferred by the company, then the same is not recognised as an asset in the books and such expenditure is charged to profit and loss account. In the other way round, if the control of the asset is retained by the company itself then it is further assessed whether it earns future economic benefits. But there will be no future economic benefits from a CSR asset in the form of any surplus and it further cannot be included in business profits as per rule 6(2) of the Companies Act 2013.
Expenditure through Trust, Society etc. A company can do its CSR activities through a registered trust, or a society, or a company established under section 8 of the Act. The expenditure incurred in this case is also treated as an expense for the year and charged to the statement of profit and loss.
Grants Received from Others the CSR expenditure is measured net of the grant if a company receives a grant from others for carrying out CSR activities.
Goods Manufactured and Services Rendered If company supplies goods manufactured by it or renders service as CSR activities, the expenditure is recognized when the control of the goods is transferred or allowable services are rendered by the employees of the company.
Accounting Treatment of Income Earned from CSR Projects while Undertaking CSR Activities When the companies are undertaking CSR activities or programmes then it is necessary to determine whether any surplus created from the activity or not. If there is a surplus then it should not be the part of the profit of the business of the company. Since the surplus from the CSR activities is not related to direct business then it does not form the part of the surplus of the business so it should be considered as the liability of the business. Hence it should be the charge to the statement of profit or loss of the company. It is noted that the surplus amount of CSR activities should not consider while calculating 2% of the amount to be spent.
Accounting for the Shortage of Funds when the Company Spends Excess for CSR When the company is not in a position to spend the specified amount for CSR then it has to disclose the reasons for the same. In some cases, the company is having a shortage of funds to spend money for CSR then it is not allowed to make the provisions for the same. But for the contractual liability’s companies are allowed to make the provisions. In some specific cases if the company spent more than the prescribed limit that is 2% of net profit then the excess amount spent is cannot be carried forward to the future years. The guidance note on accounting for CSR initiatives by Indian companies are for maintaining the uniformity and transparency in CSR reporting in India. Uniformity can be achieved in the Indian context only. To achieve harmonisation at the international level it is necessary to move forward to adopt international social reporting standards issued by IIRC (International Integrated Reporting Council), GRI (Global Reporting Initiatives) etc., if the companies follow these standards absolutely it will be benefits to both companies and other various stakeholders because it helps to bring uniformity in CSR reporting in global context. So, the present paper is intended to analyse the accounting pattern and perception of various stakeholders on the method of accounting and other aspects recognition, measurement and disclosure of CSR information by the selected Indian companies.
A derivative is generally a contract between two or more parties to hedge or to control the risk of the underlying asset whose value depends upon the future market price of the underlying asset, which includes the instruments like future, options, forward contracts, swaps etc. and accounting for derivatives is done at the end of the year to record the change in the value of the underlying asset.
Accounting for derivatives is a balance sheet item in which the derivatives held by a company are shown in the financial statement in a method approved either by GAAP or IAAB or both.
Changes in the value of the currency increase the risk for the dealers, or rapid changes in the stock market price increases the risk of investment. Hence the derivative contract is developed to control the risk of the underlying asset. For example, dealer, A of India has to pay $ 50,000 after 3 months to dealer B of the USA for goods purchased. As there are rapid changes in the market due to which the value fluctuates every day, Dealer A will enter into forward contract with the Bank for payment to pay at the rate decided irrespective of the dollar’s market price. A forward contract is a type of derivative. So, if there is a change with the dollar’s market price and agreed price between bank and dealer, the bank will record gain or loss in accounts as at the end of the financial year or end of the period of the contract, whichever is earlier.
Rules for Accounting Derivatives
Accounting of derivatives is based upon the purpose for which it is used as it can be used for speculation, i.e., to earn profit from derivatives transactions and hedging, i.e., to control the risk of future contracts. Suppose there is speculation loss that is to be recognized immediately in the accounts. Some of the rules for accounting of derivatives are as under:
- Initially, derivatives are to be recorded at fair value.
- Re-measurement of fair value is to be done at the end of the financial year or at the end of the contract period, whichever falls earlier.
- The purpose of the derivative is to be determined at the time of entering so as to decide whether it is speculation or hedging.
- Any transaction cost for entering into derivatives is to be charged to the profit and loss account immediately.
- If the derivative is of speculation in nature, the loss or profit is to be immediately recognized in the profit and loss account.
If the derivative is non-speculative, the loss or gain is to be transferred to a comprehensive income account.
Advantages
The advantages of accounting for derivatives are defined and provided as under-
- The gain or loss on the derivative transaction is recorded as per the matching principle and as per the revenue recognition concept.
- Speculation or chance of fraud can be avoided with accounting for derivatives.
- Profits and loss can be adjusted against each other in the case of derivatives transactions.
- Speculative loss is recognized immediately to discourage unauthorized speculations.
- On acquisition, derivatives are to be immediately recognized as asset or liabilities, which reflects the true and fair view of in the accounts.
- Temporary changes in the derivative’s fair value in the case of non-speculative transactions are to be recorded in the comprehensive income account.
Disadvantages
Downsides of Accounting for derivatives are explained as under-
- As derivatives are volatile in nature hence the risk is high.
- As the gain or losses on the speculative transactions are to be recorded immediately, it may result in an initial loss at the balance sheet date and subsequent gain at the end of the contract period or vice versa, which creates complexity in the accounts.
- There are chances of fraud in the case of over-the-counter transactions.
Artificial Intelligence is a broad name for computers solving problems on their own. Such computers are often based on neural networks. Neural networks resemble the structure of the human brain and can reorganize themselves for better accuracy and efficiency. This way, we try to build a real computer brain that will solve problems faster and more efficiently than human beings.
Multi-layer neural networks enable Deep learning when problems are analysed on more and more abstract levels. It means that computers can not only analyse data but also conclude in an almost human-like way.
Machine Learning involves computers that can recognize patterns in data and learn from them. There are two types of ML.
Unsupervised and Supervised Machine Learning.
In unsupervised ML you feed your computer with data, ask questions, and wait for data analysis and results. For supervised ML you add one more step when you give the computer additional knowledge. For example, you indicate that this batch of documents is fraudulent, and the other one is clear. Then, in the process of Machine learning the computer looks for patterns to distinguish one kind from another.
These technologies are trained to interact with the outer world as well. Natural Language Processing (NLP) provides computers with the ability to understand and interpret human language, written or spoken. How difficult a task it is, you can tell by observing children who learn to speak. To teach computers to look at things like humans, we use Computer vision so that they could analyse images and conclude. Nowadays, documents, videos, and images can be analysed by AI as well.
All these technologies are parts of Artificial Intelligence, and they can be used for commercial purposes. They’re used in scientific research too, but HR, FinTech, or assurance businesses know how to benefit from the newest technologies as well. Now, let’s look at how we can use AI and machine learning in accounting.
Examples of Artificial Intelligence in Accounting
We’ll start with general ideas on how AI can be used in accounting. Then we’ll move on to real-life examples of AI and ML applications. Here you’ll find 7 fields to use AI. However, it isn’t a complete list of challenges that AI can help to solve.
- Frauds - computers can support fraud detection and prevention by analysing patterns and monitoring every document within the company. They can check for accordance with accounting rules and laws. AI may then flag all the issues for humans to double-check.
- Hidden insights - in general, AI is capable of discovering hidden patterns, trends, and insights giving your company a business advantage over your competitors. The insights are also better and can be delivered on time to make quick and data-based decisions.
- Better forecasts - forecasts help plan strategical operations. Having better and deeper insights combined with Machine Learning algorithms creates an opportunity for better and more reliable forecasts. Knowing what will probably happen is invaluable.
- Data input automation - multitude of accounting employees work on data input and review. However, AI can read, analyse, and process all the documentation. And it won’t make a mistake. Even more, it can ask for data completion, if needed or flag issues for further inspection.
- Due date - This issue falls in between accounting and marketing. AI can help establish invoice due time individually for every contractor and identify those who have problems paying on time.
- Close procedure - AI can support or even replace humans in monthly or quarterly close procedures. It could even simultaneously prepare the close procedure throughout the period.
- Better audits - AI can audit 100% of a company’s documents instead of checking just a sample as humans do. It makes audits more accurate and efficient. Imagine knowing not statistically, but exactly, what happens in your company.
- Risk assessment - AI benefits from quick access to all the possible data and sophisticated predicting models. Based on what AI has learned from people, it’ll enhance risk identification and prevention.
The Benefits of AI
AI’s ability to easily extract data is undeniably convenient for accountants. But it also adds significant value that goes beyond convenience.
A solid AI program adds efficiency to the accountant role. This spares the accountant from having to conduct activities such as gathering data for audits or analysing organizational expenses. These actions tend to take up a lot of time and energy, which could take time away from other important duties like strategic financial development and maintaining regulatory compliance.
Integrating AI into accounting can also increase accuracy and reduce human error. This can further streamline the accounting process, as minimizing mistakes naturally translates into less time having to discover, track down and correct errors. From a big-picture standpoint, this can also potentially make a business less subject to large-scale accounting issues like missed payments or tax penalties.
Another benefit of AI in accounting is the ability to reduce the risk of fraud. Because artificial intelligence can audit every document related to finance, it can detect irregularities and alert accountants to their presence. While this can stop small, honest mistakes from transforming into much larger issues, it can also bring attention to large-scale suspicious behaviour in a rapid manner.
AI and Accounting
Although AI is useful in nearly every area of business, it has proven truly revolutionary in the accounting arena. Instead of spending days combing through columns of numbers, accountants can now extract the information they need with the click of a button. Not only is this a massive time saver, but it also provides more targeted data.
Data is a foundational element in AI and accounting. AI’s capacity to gather, organize, analyse and interpret numerical information can make it a valuable tool for an accountant. When its capacity is utilized fully and properly, artificial intelligence in accounting makes it possible for a company to build a more holistic accounting strategy, one that can be built on more efficient bookkeeping and financial accessibility.
Ultimately, regarding AI as an accounting tool is an important distinction for an accountant to make. AI isn’t meant to integrate with an accounting department to squeeze out the human element involved in a company’s financial oversight. It’s meant to enhance a department’s ability to provide the most accurate financial information possible. This makes AI something not to fear, but instead, embrace. Besides, no matter how sophisticated or fast an AI-based algorithm gets, there is still no replacement for the human element when it comes to applying information derived from data into a real-world financial strategy.
What Can AI Do?
To fully appreciate AI’s growing application as a viable business tool, it’s important to understand what AI can do. Its capabilities can be embraced in the business world because they point to the creation and development of a more efficient corporate community.
For example, artificial intelligence programs do more than perform advanced mathematical calculations — they read and write, too. AI programs can leverage their ability to parse news articles, emails, weblinks and legal documents to choose and present the most salient parts to comprehend. This same ability can be used to gather and analyse information to produce written content that can accurately summarize data.
AI also offers the opportunity to extend the senses, which can have numerous business applications. For instance, AI’s ability to deploy machine vision can allow it to make informed decisions that can have a positive impact on quality control and other supply chain elements that are important to business efficiency. AI-based programs built to pick up and interpret sounds can help busy professionals automate meeting minutes. Speech-based AI can make it possible for businesses to schedule key appointments and complete phone-based tasks without the need to allocate an employee’s time to do so.
While some of AI’s capabilities do indeed involve autonomous machines, these devices aren’t poised to take over the world. Devices like drones and robots can be used to handle rudimentary tasks at efficient speed, which can then free up individuals to do more advanced tasks. This extra time can allow individuals to have greater personal bandwidth, which could ultimately lead to more robust professional growth.
References:
- Lal Jawahar and Seema Sriwastava, Financial Accounting, Himalaya Publishing House
- Monga, J.R, Financial Accounting: Concepts and Application Mayoor Paper Backs, New Delhi.
- Shukla M.C, T.S. Grewal and S.C. Gupta. Advanced Accounts. Vol-1, S. Chand & Co.
- Maheshwari S.N, Financial Accounting Vikas Publishing House, New Delhi
- Jain S.P. And K.L. Narang Financial Accounting Kalyani Publishers New Delhi
- Bhushan Kumar Goyal and, HN Tiwari, Financial Accounting, Vikas Publishing House, New Delhi
- P.C. Tulsian, Financial Accounting, Tata McGraw Hill, New Delhi
- Compendium of Statements and Standards of Accounting, ICAI, New Delhi
Unit 3
Recent Trends in Accounting
Forensic accounting utilizes accounting, auditing, and investigative skills to conduct an examination into the finances of an individual or business. Forensic accounting provides an accounting analysis suitable to be used in legal proceedings. Forensic accountants are trained to look beyond the numbers and deal with the business reality of a situation. Forensic accounting is frequently used in fraud and embezzlement cases to explain the nature of a financial crime in court.
What Forensic Accountants Do
Forensic accountants examine data to determine where missing money has gone and how to recover it. They may also present reports of their financial findings as evidence during hearings, where they often testify as expert witnesses. This work serves an important purpose at public accounting and consulting firms, law firms, law enforcement agencies, and insurance companies.
The role a forensic accountant plays in each of these settings varies. Each firm deals with money in different ways, and scammers target organizations based on their duties. Some accountants work on a broader fraud case, such as those working at law enforcement agencies or law firms. Accountants working in more specific fields, such as public accounting or insurance, typically focus on specific types of fraud, such as insurance fraud. Forensic accountants working at some agencies are more likely to testify in court.
Because a forensic accountant's job is crucial for financial security and safety, the position requires certain competencies. The next section discusses the skills and prerequisites a forensic accountant needs, as well as how they apply to different cases.
Forensic Accounting Audit Procedures
A forensic accounting audit requires a different type of handling than a financial statement audit. Each situation requires a unique protocol. This process involves an initial investigation, information reporting, and a final litigation. The information below explores forensic accounting investigations and speaks to the importance of a forensic accountant's specialized skills while conducting research to make a claim.
1. Investigation
Forensic accountants typically begin an investigation and collect evidence when fraud suspicions already exist. Because of this, the data they look for when conducting an investigation include red flags and discrepancies that might indicate fraud has taken place. They may interview staff at an organization to gain more information and attempt to find the individual behind the fraud. Using the gathered information, they begin to form a hypothesis as to what happened and create follow-up plans to continue to assess the business. Once this step reaches completion, the forensic accountant determines the next necessary action and relays this information to the company.
2. Reporting
Once forensic accounting professionals gather information/data and develop a case, they present a summary of their findings to necessary personnel. Using this information, these workers determine how the fraud occurred and who played a role. Then, the accountant determines how to handle the case and suggests steps the company should take next. In addition, they may recommend ways to prevent these incidents in the future by increasing/strengthening internal security and pointing out red flags. After submitting their report, the forensic accountant prepares for their role in court proceedings related to the case.
3. Litigation
The final step of a forensic accountant's process involves participation as an expert witness in the incident's court case. The professional presents their findings as evidence in court and testifies against the offenders. They explain any evidence and interpret financial documents in understandable terms, presenting how they identified the subject. This means that the accountant must not only find evidence but also use rhetoric that makes sense to the court. Once this step reaches completion, the court determines the final decision for the situation. The forensic accountant plays an important role throughout this process.
In India, it is mandatory to undertake social welfare activities by Indian companies. Because the government of India imposed a regulation in this respect this made the companies undertake social welfare projects on mandatory basis but it is important to note that merely imposing the rules on CSR will not yield the good results so along with creating responsibility on the firms it is necessary to have comprehensive accountability through various systems such as accounting and reporting aspects.
The Corporate Social Responsibility and Sustainable development are interrelated concepts and which creates good reputations to the organisations involved in undertaking such projects voluntarily as well as the part of legal compliance (Dawkins, 2004). The companies Act 2013 is provided certain guidelines on reporting of CSR initiatives but it is necessary to have the standard which is acceptable at the global level. These guidelines apply only to Indian context and which are not recognizable at the international market because there are unique guidelines and standards which are applicable for reporting the CSR initiatives by the companies at the global level, for instance, GRI (Global Reporting Initiatives) sustainability reporting standards for reporting the non-financial performance-related information. Non-financial performances are also called as social performances of the companies. It is important to note that GRI SRs are the unique global level standards developed for reporting the social performance-related information and this will help the companies to recognize at the international level and also enables the firms to attract the global investors thereby Indian companies can grow globally. The rapid growth of CSR initiatives in the Indian scenario is indicating the positive sustainable developmental reform in the country (Jain and Winner, 2016). The disclosure of corporate social responsibility and sustainable development initiatives are an important aspect to any organisations and which are the strategies they use to establish the relationship with their stakeholders by meeting their expectations as the responsible business organisation through the communication of information on CSR and sustainable developmental initiatives (Kim and Rader, 2010). Communication of CSR and sustainability initiative information by the companies along with communication of financial performance is the best practice to get the confidence from their stakeholders (Sutantoputra, 2009). As already discussed, promoting and facilitating CSR and Sustainability initiatives disclosures, various numbers of reporting standards have been developed and which can be adopted by the companies to accounting and disclosing their social, economic, and environmental impacts on the business and economic environment in which they are currently operating. Some researchers such as Chow and Chen, 2012; Moreno and Capriott,2009; opined that many companies of the globe are not effectively disclosing the information on CSR and sustainability initiatives related information to their stakeholders and they also missing the chance to build good relationship among them. It can be observed from some studies conducted by Gill et al., 2008; Perez-Batres et al., 2010; that CSR reporting remained underdeveloped and still in infancy stage in various emerging and developing countries specifically in the Asian region.
Accounting for CSR and Sustainable Spending by the Companies in India There is a legal and mandatory requirement to undertake CSR and sustainable projects by the companies in India. This creates the responsibility on the companies but not accountability so, to bring transparency in the CSR expenditure made by the companies which come within the ambit of section 135 of the companies Act 2013, the ICAI issued guidance note on accounting for expenditure for CSR activities. This assists with the accounting of the expenditure on CSR activities and brings more accountability. Generally, the expenditure on CSR activity is to be debited to the statement of profit and loss and extra provision is made for the expenses to be incurred. There are some exceptional cases where the accounting treatment will be different. The Accounting Method for CSR and Sustainable Spending by the Companies in India in the Companies Bill, 2013 there are a list of CSR activities under Schedule VII and accounting for the same are:
Contribution to Fund For any contribution made to a fund specified in Schedule VII, the same is treated as an expense for the year and debited to the statement of profit and loss.
Expenditure Incurred by a Company itself on the CSR Activities In this case, the company needs to analyse the nature of the expenditure by keeping in view the ‘Framework for preparation and presentation of financial statements' issued by the ICAI. The revenue expenditure is charged as an expense for the year to the profit and loss account and the capital expenditure which gives rise to an asset is treated differently by assessing it whether it has control over the asset and earn future economic benefit from it. If the control of the asset is transferred by the company, then the same is not recognised as an asset in the books and such expenditure is charged to profit and loss account. In the other way round, if the control of the asset is retained by the company itself then it is further assessed whether it earns future economic benefits. But there will be no future economic benefits from a CSR asset in the form of any surplus and it further cannot be included in business profits as per rule 6(2) of the Companies Act 2013.
Expenditure through Trust, Society etc. A company can do its CSR activities through a registered trust, or a society, or a company established under section 8 of the Act. The expenditure incurred in this case is also treated as an expense for the year and charged to the statement of profit and loss.
Grants Received from Others the CSR expenditure is measured net of the grant if a company receives a grant from others for carrying out CSR activities.
Goods Manufactured and Services Rendered If company supplies goods manufactured by it or renders service as CSR activities, the expenditure is recognized when the control of the goods is transferred or allowable services are rendered by the employees of the company.
Accounting Treatment of Income Earned from CSR Projects while Undertaking CSR Activities When the companies are undertaking CSR activities or programmes then it is necessary to determine whether any surplus created from the activity or not. If there is a surplus then it should not be the part of the profit of the business of the company. Since the surplus from the CSR activities is not related to direct business then it does not form the part of the surplus of the business so it should be considered as the liability of the business. Hence it should be the charge to the statement of profit or loss of the company. It is noted that the surplus amount of CSR activities should not consider while calculating 2% of the amount to be spent.
Accounting for the Shortage of Funds when the Company Spends Excess for CSR When the company is not in a position to spend the specified amount for CSR then it has to disclose the reasons for the same. In some cases, the company is having a shortage of funds to spend money for CSR then it is not allowed to make the provisions for the same. But for the contractual liability’s companies are allowed to make the provisions. In some specific cases if the company spent more than the prescribed limit that is 2% of net profit then the excess amount spent is cannot be carried forward to the future years. The guidance note on accounting for CSR initiatives by Indian companies are for maintaining the uniformity and transparency in CSR reporting in India. Uniformity can be achieved in the Indian context only. To achieve harmonisation at the international level it is necessary to move forward to adopt international social reporting standards issued by IIRC (International Integrated Reporting Council), GRI (Global Reporting Initiatives) etc., if the companies follow these standards absolutely it will be benefits to both companies and other various stakeholders because it helps to bring uniformity in CSR reporting in global context. So, the present paper is intended to analyse the accounting pattern and perception of various stakeholders on the method of accounting and other aspects recognition, measurement and disclosure of CSR information by the selected Indian companies.
A derivative is generally a contract between two or more parties to hedge or to control the risk of the underlying asset whose value depends upon the future market price of the underlying asset, which includes the instruments like future, options, forward contracts, swaps etc. and accounting for derivatives is done at the end of the year to record the change in the value of the underlying asset.
Accounting for derivatives is a balance sheet item in which the derivatives held by a company are shown in the financial statement in a method approved either by GAAP or IAAB or both.
Changes in the value of the currency increase the risk for the dealers, or rapid changes in the stock market price increases the risk of investment. Hence the derivative contract is developed to control the risk of the underlying asset. For example, dealer, A of India has to pay $ 50,000 after 3 months to dealer B of the USA for goods purchased. As there are rapid changes in the market due to which the value fluctuates every day, Dealer A will enter into forward contract with the Bank for payment to pay at the rate decided irrespective of the dollar’s market price. A forward contract is a type of derivative. So, if there is a change with the dollar’s market price and agreed price between bank and dealer, the bank will record gain or loss in accounts as at the end of the financial year or end of the period of the contract, whichever is earlier.
Rules for Accounting Derivatives
Accounting of derivatives is based upon the purpose for which it is used as it can be used for speculation, i.e., to earn profit from derivatives transactions and hedging, i.e., to control the risk of future contracts. Suppose there is speculation loss that is to be recognized immediately in the accounts. Some of the rules for accounting of derivatives are as under:
- Initially, derivatives are to be recorded at fair value.
- Re-measurement of fair value is to be done at the end of the financial year or at the end of the contract period, whichever falls earlier.
- The purpose of the derivative is to be determined at the time of entering so as to decide whether it is speculation or hedging.
- Any transaction cost for entering into derivatives is to be charged to the profit and loss account immediately.
- If the derivative is of speculation in nature, the loss or profit is to be immediately recognized in the profit and loss account.
If the derivative is non-speculative, the loss or gain is to be transferred to a comprehensive income account.
Advantages
The advantages of accounting for derivatives are defined and provided as under-
- The gain or loss on the derivative transaction is recorded as per the matching principle and as per the revenue recognition concept.
- Speculation or chance of fraud can be avoided with accounting for derivatives.
- Profits and loss can be adjusted against each other in the case of derivatives transactions.
- Speculative loss is recognized immediately to discourage unauthorized speculations.
- On acquisition, derivatives are to be immediately recognized as asset or liabilities, which reflects the true and fair view of in the accounts.
- Temporary changes in the derivative’s fair value in the case of non-speculative transactions are to be recorded in the comprehensive income account.
Disadvantages
Downsides of Accounting for derivatives are explained as under-
- As derivatives are volatile in nature hence the risk is high.
- As the gain or losses on the speculative transactions are to be recorded immediately, it may result in an initial loss at the balance sheet date and subsequent gain at the end of the contract period or vice versa, which creates complexity in the accounts.
- There are chances of fraud in the case of over-the-counter transactions.
Artificial Intelligence is a broad name for computers solving problems on their own. Such computers are often based on neural networks. Neural networks resemble the structure of the human brain and can reorganize themselves for better accuracy and efficiency. This way, we try to build a real computer brain that will solve problems faster and more efficiently than human beings.
Multi-layer neural networks enable Deep learning when problems are analysed on more and more abstract levels. It means that computers can not only analyse data but also conclude in an almost human-like way.
Machine Learning involves computers that can recognize patterns in data and learn from them. There are two types of ML.
Unsupervised and Supervised Machine Learning.
In unsupervised ML you feed your computer with data, ask questions, and wait for data analysis and results. For supervised ML you add one more step when you give the computer additional knowledge. For example, you indicate that this batch of documents is fraudulent, and the other one is clear. Then, in the process of Machine learning the computer looks for patterns to distinguish one kind from another.
These technologies are trained to interact with the outer world as well. Natural Language Processing (NLP) provides computers with the ability to understand and interpret human language, written or spoken. How difficult a task it is, you can tell by observing children who learn to speak. To teach computers to look at things like humans, we use Computer vision so that they could analyse images and conclude. Nowadays, documents, videos, and images can be analysed by AI as well.
All these technologies are parts of Artificial Intelligence, and they can be used for commercial purposes. They’re used in scientific research too, but HR, FinTech, or assurance businesses know how to benefit from the newest technologies as well. Now, let’s look at how we can use AI and machine learning in accounting.
Examples of Artificial Intelligence in Accounting
We’ll start with general ideas on how AI can be used in accounting. Then we’ll move on to real-life examples of AI and ML applications. Here you’ll find 7 fields to use AI. However, it isn’t a complete list of challenges that AI can help to solve.
- Frauds - computers can support fraud detection and prevention by analysing patterns and monitoring every document within the company. They can check for accordance with accounting rules and laws. AI may then flag all the issues for humans to double-check.
- Hidden insights - in general, AI is capable of discovering hidden patterns, trends, and insights giving your company a business advantage over your competitors. The insights are also better and can be delivered on time to make quick and data-based decisions.
- Better forecasts - forecasts help plan strategical operations. Having better and deeper insights combined with Machine Learning algorithms creates an opportunity for better and more reliable forecasts. Knowing what will probably happen is invaluable.
- Data input automation - multitude of accounting employees work on data input and review. However, AI can read, analyse, and process all the documentation. And it won’t make a mistake. Even more, it can ask for data completion, if needed or flag issues for further inspection.
- Due date - This issue falls in between accounting and marketing. AI can help establish invoice due time individually for every contractor and identify those who have problems paying on time.
- Close procedure - AI can support or even replace humans in monthly or quarterly close procedures. It could even simultaneously prepare the close procedure throughout the period.
- Better audits - AI can audit 100% of a company’s documents instead of checking just a sample as humans do. It makes audits more accurate and efficient. Imagine knowing not statistically, but exactly, what happens in your company.
- Risk assessment - AI benefits from quick access to all the possible data and sophisticated predicting models. Based on what AI has learned from people, it’ll enhance risk identification and prevention.
The Benefits of AI
AI’s ability to easily extract data is undeniably convenient for accountants. But it also adds significant value that goes beyond convenience.
A solid AI program adds efficiency to the accountant role. This spares the accountant from having to conduct activities such as gathering data for audits or analysing organizational expenses. These actions tend to take up a lot of time and energy, which could take time away from other important duties like strategic financial development and maintaining regulatory compliance.
Integrating AI into accounting can also increase accuracy and reduce human error. This can further streamline the accounting process, as minimizing mistakes naturally translates into less time having to discover, track down and correct errors. From a big-picture standpoint, this can also potentially make a business less subject to large-scale accounting issues like missed payments or tax penalties.
Another benefit of AI in accounting is the ability to reduce the risk of fraud. Because artificial intelligence can audit every document related to finance, it can detect irregularities and alert accountants to their presence. While this can stop small, honest mistakes from transforming into much larger issues, it can also bring attention to large-scale suspicious behaviour in a rapid manner.
AI and Accounting
Although AI is useful in nearly every area of business, it has proven truly revolutionary in the accounting arena. Instead of spending days combing through columns of numbers, accountants can now extract the information they need with the click of a button. Not only is this a massive time saver, but it also provides more targeted data.
Data is a foundational element in AI and accounting. AI’s capacity to gather, organize, analyse and interpret numerical information can make it a valuable tool for an accountant. When its capacity is utilized fully and properly, artificial intelligence in accounting makes it possible for a company to build a more holistic accounting strategy, one that can be built on more efficient bookkeeping and financial accessibility.
Ultimately, regarding AI as an accounting tool is an important distinction for an accountant to make. AI isn’t meant to integrate with an accounting department to squeeze out the human element involved in a company’s financial oversight. It’s meant to enhance a department’s ability to provide the most accurate financial information possible. This makes AI something not to fear, but instead, embrace. Besides, no matter how sophisticated or fast an AI-based algorithm gets, there is still no replacement for the human element when it comes to applying information derived from data into a real-world financial strategy.
What Can AI Do?
To fully appreciate AI’s growing application as a viable business tool, it’s important to understand what AI can do. Its capabilities can be embraced in the business world because they point to the creation and development of a more efficient corporate community.
For example, artificial intelligence programs do more than perform advanced mathematical calculations — they read and write, too. AI programs can leverage their ability to parse news articles, emails, weblinks and legal documents to choose and present the most salient parts to comprehend. This same ability can be used to gather and analyse information to produce written content that can accurately summarize data.
AI also offers the opportunity to extend the senses, which can have numerous business applications. For instance, AI’s ability to deploy machine vision can allow it to make informed decisions that can have a positive impact on quality control and other supply chain elements that are important to business efficiency. AI-based programs built to pick up and interpret sounds can help busy professionals automate meeting minutes. Speech-based AI can make it possible for businesses to schedule key appointments and complete phone-based tasks without the need to allocate an employee’s time to do so.
While some of AI’s capabilities do indeed involve autonomous machines, these devices aren’t poised to take over the world. Devices like drones and robots can be used to handle rudimentary tasks at efficient speed, which can then free up individuals to do more advanced tasks. This extra time can allow individuals to have greater personal bandwidth, which could ultimately lead to more robust professional growth.
References:
- Lal Jawahar and Seema Sriwastava, Financial Accounting, Himalaya Publishing House
- Monga, J.R, Financial Accounting: Concepts and Application Mayoor Paper Backs, New Delhi.
- Shukla M.C, T.S. Grewal and S.C. Gupta. Advanced Accounts. Vol-1, S. Chand & Co.
- Maheshwari S.N, Financial Accounting Vikas Publishing House, New Delhi
- Jain S.P. And K.L. Narang Financial Accounting Kalyani Publishers New Delhi
- Bhushan Kumar Goyal and, HN Tiwari, Financial Accounting, Vikas Publishing House, New Delhi
- P.C. Tulsian, Financial Accounting, Tata McGraw Hill, New Delhi
- Compendium of Statements and Standards of Accounting, ICAI, New Delhi