Category

Accounting

Oct 02
0

Revolutionizing Finance: How AI is Transforming Reporting and Audits

By | Accounting, Nonprofit | No Comments
person using laptop with overlay screen of virtual financial reports

AI is transforming all areas of business. One area where it holds great promise is in financial reporting and audits. AI brings several strengths to financial reporting and audits, including the ability to review and synthesize vast amounts of data. It is also quite good at pattern recognition and can spot anomalies in financial data. Instead of the CFO gathering reports and data manually, data can be ingested into an AI-enabled system to help prepare for audits. Here, we take a look at the state of how AI is transforming reporting and audits, and how it may impact your organization.

The State of AI Adoption in Finance and Accounting

The latest McKinsey report on AI adoption states that 65% of respondents regularly use GenAI. This represents an increase over the response to the 2023 survey. A KPMG report focused solely on AI and financial reporting and audits clarifies further how financial leaders plan to use AI. Among those responding to the KPMG report, 100% stated they plan to use GenAI for financial reporting in the next three years as compared to 71% who answered yes to the same question in 2023. Clearly, there is growing acceptance of the use of AI in finance. Financial leaders are seeing the benefits and exploring its many uses.

According to the KPMG report, financial leaders see the following benefits and uses of AI in reports and audits. (Note: respondents could choose more than one answer.)

  1. Real-time insights into risks, fraud, and control weaknesses: AI can continuously monitor financial data, identifying anomalies and potential issues as they arise, which 70% of surveyed leaders found valuable.
  2. Lower costs: Automating repetitive tasks and improving efficiency helps reduce operational costs, a benefit noted by 58% of respondents.
  3. Ability to predict trends and impacts: AI’s predictive analytics can forecast financial trends and potential impacts, aiding strategic planning. This was highlighted by 57% of those surveyed.
  4. Increased data accuracy and reliability: AI enhances the accuracy and reliability of financial data by minimizing human error and ensuring consistent data processing, appreciated by 57% of participants.
  5. Better data-enabled decisions: With more accurate and timely data, decision-making processes improve, benefiting 53% of the surveyed leaders.

Getting Started with AI in Financial Reporting

Given these benefits, how can you get started with using AI in financial reporting?

There are many, many considerations.

  1. Assess AI readiness: Is your organization ready for AI? It’s more than a matter of updating your accounting and finance software so that the new features are enabled. It’s ensuring that your organization has a sound data policy in place, including security, privacy, governance, and standards. Smart use of AI begins with good data policies. AI requires copious amounts of clean data to work well. How is your data? If you aren’t sure, speak with a consultant who specializes in nonprofit accounting to better understand your organization’s data, how it may be used, and what safeguards may be needed to utilize it in an AI platform.
  2. Don’t reinvent the wheel: Before searching for an AI-enabled financial tool, explore the platforms you are already using. Most, if not all, software vendors have added AI features over the past year or are planning them for upcoming releases. Check with your software consultant or vendor to learn what’s available within your current platform before buying a new one. You may be able to use the one you have quite well for the tasks you need automated with AI.
  3. Create AI policies for your organization: AI consists of public AI platforms (Microsoft CoPilot, ChatGPT, and others) as well as private AI (those used within a specifically licensed, proprietary platform, such as a finance or accounting platform.) When using publicly available tools like the search function in Microsoft Copilot or ChatGPT, be aware that anything you put into these tools becomes part of its immense data set. Nothing proprietary or confidential, like financial statements, reports, or personal information, should ever be added to such tools. You may wish to add an AI use policy to your existing policy manual and add a session on AI use to any cyber security training you run for your team now.

Adding AI to financial and auditing reports and processes can improve efficiency. It can enhance accuracy, spot problems, and provide draft documents faster than you may be able to do on your own. However, as with anything produced using AI, outputs must be reviewed and fact-checked by humans before sharing it with coworkers, boards, directors, constituents, and others.

AI is a powerful tool that offers excellent potential. When used correctly, it can transform your financial and audit reporting.

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.

Sep 17
0

Evaluating Changes in 2024 Compliance – Where Do You Stand?

By | Accounting, Audit, Nonprofit | No Comments
person moving blocks with people icons and justice scales

We are rapidly heading into the final calendar months of 2024. Many changes this year have impacted the nonprofit landscape. Audits, changing regulations, and the economic environment have each created its own set of challenges. The following 2024 accounting changes all merit evaluations at this point in the calendar year to see what, if any, changes our organizations should make for compliance and adherence to best practices, laws, and regulations.

The following highlights several areas of nonprofit accounting compliance that have changed this year. These changes impact auditing, leases, and much more. To stay abreast of nonprofit changes, check out our blogs and speak with the experts at Welter Consulting for specific audit preparation and support.

Lease Standard Implementation

Changes affecting lease standard implementation went into effect two years ago. Organizations should evaluate their previous estimates on leases to ensure the estimates are reasonable and supportable.

Organizations who have leases under common control should also take a second look at FASB Accounting Standards Update (ASU) No. 2023-01, Leases (Topic 842): Common Control Arrangements. Changes in the determination of whether related party arrangements fall under the scope of FASB Accounting Standards Codification (ASC) Topic 842 and how the amortization term for leasehold improvements is determined should be re-evaluated.

Current Expected Credit Loss

FASB ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments replaces the current method of recognizing expected credit loss (CECL) with the requirement to estimate losses expected over the contractual life of a financial asset. It went into effect for fiscal years starting December 15, 2022. Under this new model, moving forward, the expected losses must be based on one of three things: historical experience, current conditions, and reasonable/supportable forecasts.

Financial assets nonprofits should consider complying with this guideline include trade receivables, promissory notes receivable, loans receivable, grants receivable following the exchange transaction model and off-balance sheet credit exposures. There is flexibility in the estimation models if the approach is supported by evidence and is deemed reasonable.

New Statements on Auditing Standards

Starting on or after December 15, 2023, Statements on Accounting Standards (SAS) numbers 143-145 will be effective. These cover auditing standards for financial statements. Nonprofits can expect to see changes in audit procedures relating to how estimates found in financial statements are tested, for example, and audit procedures when specialists are used. 

Yellow Book 2024 – Changes to Auditing Procedures

The GAO issued Government Auditing Standards changes on February 1, 2024. These changes add application guidance to Chapter 6, Standards for Financial Audits, and seek to provide clarity as to when the concept of reporting key audit matters. These concepts might apply when organizations receive government financial assistance or to government entities.

Get Help Keeping Up with Changes

As you can see, there are many changes and updates to nonprofit accounting – and that’s just a few of them! To keep up with accounting changes, it’s helpful to have a partner with both an accounting and nonprofit background, like Welter Consulting, who can offer advice and guidance throughout the year.

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.

Aug 20
0

Employee Retention Credit Compliance for Nonprofits: Are You at Risk of an Audit?

By | Accounting, Audit, Nonprofit, Tax | No Comments
folders and notepad, employee retention tax credit

Enacted in 2020 as part of the Coronavirus Aid Relief and Economic Security (CARES) Act and now codified at IRC section 3134 (after various amendments), the Employee Retention Credit (ERC) is a refundable tax credit available for certain employment tax quarters in 2020 and 2021. And while it may have helped some organizations and people financially, over the past two years, the IRS has warned that many who claimed the tax credit were ineligible to receive it.

The IRS is increasing its enforcement campaign in 2024 and targeted for potential audits are those who benefited from this tax credit. The IRS is looking for those who received this benefit in error. Some ERC promoters, for example, charged fees to help organizations apply for and receive the credit. Many of these companies charged fees commensurate with the funds they were able to secure, a recipe for problems. Now, the IRS is increasing enforcement of the requirements around the ERC, and organizations may find themselves on the receiving end of an inquiry or audit.

Nonprofits May Be at Risk for Noncompliance

Unfortunately, these ERC promoters heavily targeted certain nonprofit organizations, including religious organizations and healthcare nonprofits. Those who realize that they made a mistake and perhaps should not have received funds will face some penalties.

Many organizations who applied for ERCs will find they did not fully comply with the requirements simply because they didn’t fully shut down during the pandemic. A good example is a house of worship that moved its services online during the pandemic. Yes, the building’s doors were closed, and congregations could not gather in person, but services were held online. This is akin to a business shutting its office doors but asking employees to work from home; it is not a full shut down, and therefore did not comply with all the rules around receipt of the tax credit.

Next Steps to Get Back into Compliance

If the IRS determined that you received ERC tax credits and did not comply with the rules around them, your organization may face penalties like those for erroneous refunds. These may include:

  • Bills for previously unreported taxes
  • Penalties
  • Interest or penalties extending back in time to the date when the mistake occurred.

Take Action Now

If you’re afraid that your organization made a mistake and incorrectly received an Employee Retention Credit, it is vital that you consult with a tax and accounting professional immediately for specific guidance. Professionals can help you get back into compliance with the law and assess any potential fees. Working together, you can ensure that, moving forward, your organization will comply with the law and pay any penalties owed.

The pandemic upended many things and caused a great deal of disruption for all businesses, both for-profit and nonprofit. The ERC was intended to help individuals during a time of national crisis. Unfortunately, some companies targeted nonprofits aggressively to rake in fees on their own for the ERCs and may have steered organizations into accepting erroneous refunds. It’s important to act quickly if you think your organization may be at risk. Mistakes can happen to anyone, but it’s how you address them that counts.

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.

Aug 15
0

Is AI Useful to the CFO Role? A Few Thoughts on the Role of Artificial Intelligence

By | Accounting, Nonprofit | No Comments
woman at desk using phone and laptop

Since generative AI rolled out to the public in November 2023, there has been much debate about its usefulness in business. Although some form of artificial intelligence has been available through technology platforms for many years, like spellcheck in word processing applications or design assistance in presentation creation software, AI can now be found in everything from nonprofit accounting platforms to government accounting. Is it hype? Is it helpful? Let’s examine the use of artificial intelligence in accounting and how it may be helpful to CFOs.

What Is Artificial Intelligence?

Artificial intelligence uses machine learning and large language models to generate responses to inquiries. The new generative AI models can ingest images as well as text and produce what appear to be innovative responses. However, for the most part, AI generates a synthesis or amalgamation of what it has learned. It cannot create fresh information on its own but must rely upon previous input to form seemingly new thoughts.

Potential Uses of AI in Accounting

All AI-based systems are great at taking in vast amounts of data and analyzing it faster than humans can perform the same task. While people are better at creating something new, AI is better at spotting patterns and detecting anomalies within patterns—and that’s where it can become the CFO’s best friend.

Several possible uses for AI in accounting include:

  1. Fraud detection: Because AI is good at understanding rules and applying rules to large amounts of data, it can apply accounting rules to data and help detect possible fraud. Although an AI detection system shouldn’t be used solely to determine fraud, such a system could potentially flag possible fraud for a human accountant to review and investigate.
  2. Audit testing: Certain types of audits include testing random samples of things such as contracts. Because neither the contract form nor the language is standard, random samples are taken for review. Improved optical character recognition (OCR), a type of artificial intelligence, could scan all forms and input them for an accountant to review.
  3. Outlines and drafts of documents: While AI cannot create new text, it can take existing text and build an outline or even a rough draft of a new document.

Dangers of AI in Accounting

With all new technologies comes possible dangers. Many of the potential dangers of AI in accounting can be offset by clear governance around the use of AI in organizations and monitoring its use for potential problems.

The possible dangers include:

  1. Disclosure of confidential information: Platforms such as Microsoft CoPilot and ChatGPT are open AI systems, meaning they use the data inputted into their platforms to increase the entire bank of knowledge. Inputting anything into their systems means it goes into the public repository of information. If you do not wish confidential information shared, it should not be used in an AI tool that taps into public AI-based systems.
  2. Hallucinations: AI can and does hallucinate. This means it makes up answers. Some of these answers are incorrect or even nonsensical. A famous example is the AI platform that insisted there is no country in Africa beginning with the letter K. When the questioner informed the AI that Kenya begins with K, it returned an absurd answer. Such stories are legion. For accountants, hallucinations or inaccuracies can be dangerous. Accountants using AI-based tools should ensure human review and oversight of AI-generated answers to spot potential hallucinations.
  3. Infringement: The courts have only begun reviewing cases related to AI-generated materials. In certain cases, AI may repeat copyrighted information verbatim. This could lead to potential infringement violations.

Responsible and Ethical AI Use

AI is here to stay. You can’t put the genie back into the bottle. How can you use AI safely and ensure your organization is following best practices and ethics for AI use?

  • Develop a set of governance standards on the acceptable use of AI in your organization. Don’t leave it to chance. Work with cross-department teams to develop guidelines on the appropriate use of AI.
  • Ensure that your team understands that proprietary materials should never be shared with AI.
  • Do not use outputs from AI verbatim. Use them as drafts and rework them. Or use AI to develop summaries and outlines and write your own materials based on these outlines.

Embracing AI

AI has its place in business. It can help with many tasks, but it can never replace people. If AI can help, and you can develop responsible and ethical guidelines for its use, it may be worth incorporating it into your systems.

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.