Monthly Archives

February 2024

Feb 23
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Can Artificial Intelligence Become an Accounting Expert?

By | Accounting, Nonprofit | No Comments
person using laptop computer with right hand and holding mobile phone in left hand with Artificial Intelligence screen overlay

An interesting debate has arisen among accounting professionals: Can AI become an accounting expert?

AI has been around for several years but exploded into the national consciousness in November of 2023 when Microsoft unveiled ChatGPT. This generative AI platform uses large language models and machine learning to produce natural-sounding text quickly and efficiently.

While many hailed its advent as an exciting time in computer history, others were quick to curb their enthusiasm for GenAI. There are many good uses for it, for example, to summarize transcripts of calls or to create eye-catching headlines. However, AI makes mistakes—plenty of them. We do not believe that it is ready to take the place of an accountant. Here’s why AI makes a terrible accountant.

AI Makes (Sometimes Big) Mistakes

One of the most blatant errors made by ChatGPT was its insistence to a questioner that “no country in Africa begins with the letter K.” When the questioner pointed out that Kenya begins with a K, the response from ChatGPT was a veritable word salad of gibberish. It lacked logic. It lacked discrimination. Worse, the answer was wrong.

Accountants found out the same thing, as have many other professionals. AI’s answers can be wrong. It can draw erroneous conclusions or even “hallucinate.”

AI models return answers that are heavily dependent on how the input question is worded. Questions that are too complex can return poor answers. Ambiguity can also confuse the models and return incorrect responses.

AI also lacks the ability to distinguish source materials as good or bad. Instead, it may view all documents as equal—documents published by the Journal of Accountancy could be viewed with the same gravitas as documents published by Joe Blogger (no offense if that’s your name), who doesn’t have a CPA. The response might be fine, or it might be trained by Joe Blogger’s lack of in-depth knowledge of corporate finance.

Lastly, the models can hallucinate or return gibberish. No one knows why this occurs or even how often it does, but sometimes, question-and-answer sessions with an AI model devolve into peculiarly odd conversations.

AI Lacks Firsthand Experience

Consider how much knowledge and firsthand experience the average accountant possesses. Each human being is unique, and their background and special area of expertise make them well-suited for certain tasks. A nonprofit accountant has a very different background from someone who works for a large accounting firm; each person brings to their task a unique viewpoint or lens through which they see the problems and solutions at hand.

AI models have no such discrimination. They can produce information based on the inputs of their models and the ability to draw conclusions from their databases with newer GenAI models. But they cannot reach out beyond their databases to seek information, have flashes of inspiration, or remember something that can help with an immediate problem. All of these are human attributes, and an AI model cannot replace a human accountant’s flash of inspiration or memory of a similar problem encountered years ago.

Client Confidentiality

Another area that may be problematic is client confidentiality. AI models ingest and retain whatever data is fed into them. Therefore, if you input proprietary client information—say, asking the AI model to summarize the transcript of a client call—it will retain the information. It may use that information to inform a response to someone else. And, while it probably won’t mention your client by name, you certainly do not want confidential information floating around cyberspace forever. Never share anything confidential with an AI model.

What Can AI Do For You?

It seems like everyone is experimenting with AI, and that’s fine. Treat it like an experiment, but do not rely on it for accurate answers to accounting questions. AI may be evolving, but it has a long way to go before taking your place in the corner office.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.

Feb 14
0

How to Include Overhead in a Grant Request

By | Grant Management, Nonprofit | No Comments
person at laptop computer with dashboard printouts on desk, Grant Request

If you’ve ever completed a grant request, you know that some areas can be confusing. One such example is where to include overhead. Actually, it’s not as confusing as it sounds. It involves accounting for indirect costs that are not directly tied to a specific project but are necessary for the overall operation of an organization. Overhead costs can include administrative expenses, utilities, rent, and other general operational costs.

The Problems with Underestimating Overhead

It’s vital to consider overhead when drafting your grant request. Failing to do so can cut into your margins, making it difficult to run sustainable programs. Everything from rent to utilities must be included in your costs to ensure that the grant funds adequately cover the services rendered. If you don’t include overhead costs in your grant applications, you’ll still end up paying for them, but you’ll have to find the money from other areas of the budget, such as donations.

Using the Indirect Cost or De Minimis Rate Method: Which to Choose?

There are two methods for calculating overhead: the indirect cost method and the “de minimis” rate.

  • The indirect cost method takes a percentage of overhead relative to the direct costs of the program and uses that amount to calculate overhead costs.
  • The de minimis rate is a standard percentage of the modified cost rate. De minimis is easier to calculate but potentially less accurate.

You can choose to use either method, but it is important to choose one and use it consistently for clarity.

Indirect Costs – Overhead

Overhead costs encompass indirect expenses that are not directly allocated to specific programs or projects but are crucial for the overall operations of the organization. These costs play a vital role in maintaining the organization’s infrastructure, supporting its mission, and ensuring efficient day-to-day functioning.

Administrative costs, covering items like salaries for administrative staff, office supplies, utilities, and rent, contribute to the general management and oversight of the organization. Additionally, overhead costs include expenditures associated with technology and information systems, financial management activities like accounting services and auditing, and governance-related expenses such as board meetings, legal services, and compliance activities.

Nonprofits need to strike a balance in managing overhead costs responsibly, aiming to allocate a significant portion of their resources directly toward fulfilling their mission while ensuring the sustainability and effective functioning of the organization.

Comply with Funding Policies

One important tip: When accounting for indirect costs in grant applications, be sure to comply with the funder’s policies. Some funders list a rate not to exceed, while others specify a percentage. When the allowable overhead costs aren’t specified, you have more leeway to request the needed funds and negotiate them as part of the grant process.

Provide Supporting Documents

Along with your indirect cost assumptions and requests, funders typically ask for financial information to back up the request. These may be copies of the organization’s cash flow statement, balance sheet, or similar materials. Some funders may be more stringent, and request only audited financial statements. You may also be asked to sign a form certifying that the information presented is accurate and truthful.

If the organization has some leeway to negotiate indirect costs, providing financial statements offers proof points that back up your request for funds as part of the grant process. It will demonstrate the basis upon which you have calculated the indirect costs.

Supporting Mission with Margin

Lastly, be ready to demonstrate how the grant funds, and especially the portion requested as indirect funds for overhead, support your organization’s mission. Demonstrate how your organization pays careful attention to costs. The narrative around indirect costs and overhead should be about how you will use the funds wisely, not an apology for asking for them. After all, every organization needs a place from which to work and funds to pay rent, utilities, IT support, and so on. To fulfill your mission, you need the margin—and the funding—to run programs and services. Requesting funds for overhead is a necessary step in the grant application process.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.