Artificial Intelligence and Reliability of Accounting

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Saeed Askary, Nasser Abu-Ghazaleh, Yasean A. Tahat

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Saeed Askary, Nasser Abu-Ghazaleh, Yasean A. Tahat. Artificial Intelligence and Reliability of Ac-
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 Artificial Intelligence and Reliability of Accounting Information
Saeed Askary, Nasser Abu-Ghazaleh, Yasean A. Tahat
Gulf University for Science and Technology, Hawally, Kuwait
{askary.s, AbuGhazaleh.N, [email protected]}

Abstract. Producing relevant and reliable accounting information is the main

responsibility of accounting profession. Reliability and relevance of accounting
information heavily depend on a sound internal control system as well as
management and employees ethical and integrity characteristics. This paper shows
how Artificial Intelligence innovatively works with the internal controls systems to
help managers to produce high-quality accounting information by reducing
information risk. Despite many types of research proposed using Artificial
Intelligence in accounting and auditing, but none of them directly showed how to
reduce information risk using Artificial Intelligence. The research benefits
companies cut many costs and losses of failing to produce reliable accounting
information, help managers to make a better decision and in overall improve entities
performances. This paper proposes a general model to be applied by all type of
business entities how practically use Artificial Intelligence to automate removing
the weakness of internal control systems. This, in turn, reduces control risk,
detection risk and increase audit quality by reducing accounting information risk.

Keywords: Artificial Intelligence, Accounting information, Internal control

systems, Reliability, Relevance.

1 Introduction
The Institute of Chartered Accountants of England and Wales (ICAEW) issued “Artificial intelligence and
the future of accountancy” article in 2017 and addressed applying and using this technique in accounting
and auditing profession. ICAEW viewed from many successes in three perspectives: long-term visions,
understand technology and application for accounting. Designing and developing knowledgeable
organization using artificial intelligence technique is growing rapidly ([26]; [21]). All companies in the
global business and economy deal with technology issues to survive in which Artificial Intelligence would
be an appropriate solution for this problem ([16]). Global Survey in Artificial Intelligence (2017)
Forrester Research has predicted a “greater than 300% increase in investment in artificial intelligence in
2017”, compared with 2016, a testament to the sector’s rapid global growth. ([25]) banking and
manufacturing would be more benefited from Artificial Intelligence. Artificial Intelligence application in
accounting includes big data analysis, produce accurate, reliable, and on-time accounting information for
the users. Brown et al. (1995) considered that Artificial Intelligence impact significantly on accounting
and auditing practices as well as internal control structure[5].

In long-term vision Artificial Intelligence helps accounting profession by focus on purpose of accounting
profession for organization which is to use accounting information to make good decision by users of the
information. In exploiting powerful technologies, think radically and being adaptable. In understanding
technology, Artificial Intelligence helps human decision-making, strengths of machine learning, and to
utilize the decision process of enterprises information management.
Accounting systems are moving very fast toward being more integrated with and intelligent logic through
applying Artificial Intelligence ([6]). Since the purpose of accounting profession is to provide relevant
and reliable financial information for various users to make useful decisions, using Artificial Intelligence
to produce such a reliable and relevant information would be more supportive. However, accounting
systems are significantly depending on the internal control system to produce such a reliable information.
For this reason, investigating how Artificial Intelligence help managers to remove weaknesses of internal
control system to produce useful accounting information for the users would be questionable. This paper
will show how Artificial Intelligence will enhance the efficiency and effectiveness of internal control
system in producing highly reliable accounting information.

Artificial Intelligence is a mix of software and equipment as a substitute for human intelligence enable to
solve complex business problems using reasoning, learning, elucidating, and recognizing patterns same as
human expert. Artificial Intelligence uses expert system instead of expert human and apply machine
intelligence instead of human intelligence. Artificial Intelligence has great impact on helping manager in
making decision by reducing repetitive decisions, providing more precise information, simplifying
complex decision factors, and fact processing data analysis [24].

The benefits of Artificial Intelligence in the future of accounting including reducing automotive tasks,
increasing produced reliable financial information, simplifying complicated accounting and auditing
cases, more accurate and precise information and timeliness for decision makers [5]. The gap in the
literature shows that how Artificial Intelligence can reduce accounting information risk to increase
confidence of the information users. This paper aims to address the gap of role of Artificial Intelligence
in reducing accounting information risk.

The purpose of the study is to see how Artificial Intelligence help companies to remove internal control
weaknesses to produce reliable accounting information. Although, there are many research about the
importance of the Artificial Intelligence in business decision making but there is not any research show
how Artificial Intelligence can improve the quality of accounting information by strengthens of the
internal control systems. The rest of the paper is organized in this way. Frist, we review literature about
the use of Artificial Intelligence in accounting and auditing profession. Then, we show how Artificial
Intelligence can be applied in developing and designing internal control system to produce reliable
accounting information. Finally, the paper shows how Artificial Intelligence can reduce the accounting
information risk.

2 The importance of Reliability of Accounting Information

According to Maines and Wahlen (2006) reliability is an essential characteristic for accounting
information which is useful for decision making and it represents the extent to which the information is
unbiased, free from error, and representationally faithful [22]. To achieve this, one of the crucial factor is
to establish a strong internal control system. SEC defines internal control as 'a process, effected by an
entity's board of directors, management and other personnel, designed to provide reasonable assurance
regarding the reliability of financial reporting'. As stated by Elbannan (2009) the higher the quality of
internal controls over financial reporting, and thus user better trust on the reports for making better
decision [12].

One of the main problem in producing low quality accounting information is related to the weakness of
internal control systems. The Sarbanes-Oxley Act of 2002 highlights the importance of information
system controls by requiring management and auditors to report on the effectiveness of internal controls
over the financial reporting component of the firm's management information systems [12]. One of the
main reason for weakness of the internal control systems is related to poor corporate governance. Also,
cost-benefit constrain may impact the developing, designing, implementing, and maintain an effective
internal control systems[14].

To deal with removing weakness of the internal control system have been researched by many studies
(e.g. see [6]; [9]; [12]). After initiating SOX 2002, the management of the companies, auditors, audit
committee and SEC as well as PCAOB have paid more attention to the issue of removing weakness the
internal control system [20]. Also, modern technology helped business enterprise to reduce the weakness
of the internal control system. However, using effective innovate means such as Artificial Intelligence is
more predictable then before.

There are a handful of research in accounting and auditing showing how Artificial Intelligence application
to help to uncovered relationship between those variables affecting accounting information [18]; [28].
Artificial Intelligence help better to cover all variables involved with a problem and not just cover a few
of them in solving accounting and auditing dilemma. Artificial Intelligence would be one of the solution
to remove weakness of internal control systems. Generally, Artificial Intelligence use the multitude of
related technologies and then integrating those technologies into full solutions. Kahraman, et al. (2011)
showed how intelligence techniques have been used in information management systems [16]. Artificial
Intelligence use Intelligent decision support systems (IDSS) to automate performing and running
activities. IDSS term describes decision support systems that heavily rely on using artificial intelligence
techniques. The intelligence techniques used in enterprise information management (EIM) such as fuzzy
set theory (FST), multi-agent systems (MAS), neural networks (NNs), genetic algorithms (GAs), ant
colony optimization(ACO) and particle swarm optimization (PSO) (Ibid). For example, fuzzy logic and
theory and neural network used for auditing research to predict fraud and improving audit quality (AlAli
et al. 2018, Beynon et al. 2004).

3 The Role of Internal Control Systems

The main purpose of almost every internal control system is to manage risks factor that prevent an
enterprise to achieve their strategic goals. Every organization aims to achiever their strategic goals by
designing, developing, implementing and maintaining an effective and efficient internal control systems.
According to SOX (2002), management of publicly listed company is responsible to develop and maintain
an effective and efficient internal control system. Figure 1 is an adjusted model of Ling’s study that shows
a dynamic internal control system.

Figure 1. Modified Ling (2015) Model

According to Ling (2015) and as the figure 1 shows, internal control systems can be in optimal position by
continuous internal control assessment and improvement. This could be achieved by applying COSO
framework. According to Länsiluoto et al. (2016) the COSO of the Treadway Commission has issued two
globally recognized internal control frameworks. The first is Internal Control – Integrated Framework,
and was published in 1992 and the second called COSO Enterprise Risk Management, issued in 2004. The
frameworks of both are based on a conceptual framework compatible with COSO ERM (2004). COSO
identifies that a central role of internal control is"...a means to identify and analyze risks, and to develop
and manage appropriate responses to risks within acceptable levels and with a greater focus on anti-fraud
measures...." Internal control has three types of objectives; operations, reporting, and compliance
objectives [17].

CEO and CFO of public company’s top management, has a responsibility to report through the
management report on the effectiveness of internal control over financial reporting [13]. In internal
control theory, the more stronger is the internal control system, the more reliable and high quality would
be the accounting information and financial reporting. That is why external auditors should examine and
report on the internal control effectiveness and efficiency along with audit report about the financial
statements. Also, internal auditors, working under the audit committee, continuously monitor the issue
and report to the committee on on-going basis.

The main weakness of internal control systems in every organization is related to the system disability to
protect the assets and producing reliable and relevant accounting information. The system, at risk, allows
fraudulent financial transaction being processed to the system in which produce unreliable accounting
information. In this case, control risk would be high and auditor should be notified of detection risk.
Thus, all those material misstatements that internal controls could not detect them, the auditor should find
them by control test and in the worse case by increasing audit evidence in which will increase audit costs.
 4 Internal Controls Systems and Information Reliability
In July, 2002, the United States government approved the Law Sarbanes-Oxley Act (SOX) in response to
a wide range of financial scandals (e.g. Enron, WorldCom, etc.); one of the concern was about the internal
control system strengthens and improving the accounting information quality. The general theory drawn
from the law was based on the interaction between good corporate governance mechanism, strong internal
control system, and high level of auditor’s independence to produce reliable accounting information.

Canelas et. al. (2013) raised the question about how information technologies through Artificial
Intelligence can help and support decision making related to the SOX mandates [7]. There are two type of
studies; one before the SOX Law and another one after the law introduced. The studies showed how
companies concern about publishing truthful financial reports and suggesting some intelligent systems to
support external auditors in their decision making processes to state if those reports were truthful or not.
AI should help managers to produce the information in which would be more trustable for the users. This
could be by removing and resolving complicated situations through Artificial Intelligence such as
weakness of internal control system of cash, inventory, etc.

Doyle et al. (2005) studied the relationship between weak internal control and increased opportunities for
intentional earnings management techniques and unintentional accounting estimation errors [11]. If
Artificial Intelligence can strength the internal control systems, then the opportunities for intentional
mistakes would be decreased. In turn, this will decrease control risk and higher the quality accounting
information for the users.

Artificial Intelligence, in current high-powered technology, should help managers to remove weakness of
internal controls through recognizing, analyzing and removing those weakness and then provide final
solutions with more accurate and quick remedies before many damages incurred to the entity. Artificial
Intelligence can reduce the accounting information risk by removing the weakness of internal control
systems through the following solution. Artificial Intelligence can sense the weakness, comprehend the
main problem, and do actions for removing the weakness through a programed expert decision making
automatically [2].

Sense
Sense is similar to a border-control kiosk that uses computer vision technology such as facial recognition
to uncover characteristics of weakness of internal controls. When this integrated with other technologies
such as multispectral image analysis (e.g. video analytics, extensive information database and matching
algorithms) it removes main weakness such as those related to inventory control systems.

Comprehend
Artificial Intelligence system also use technologies such as natural language processing, inference engine
and expert systems to overcome the weakness of internal control system. Each of the technologies can be
used through different applications. Date gathered from the sense section should be used by the
technologies to be analyzed for the next section which is Act section.
Act
An Artificial Intelligence system acts in two ways; independently and in process. If Artificial Intelligence
can work independently in regard to removing the weakness of internal controls, the Artificial Intelligence
help to act this job without any human interfere to find, analysis and to decide how resolve the weakness
without any human assistance. If the weakness suppose to be removed in process, then this kind of act
would be applied for those internal control systems with discrete functions.

Artificial Intelligence, by reducing control risk, will be able to reduce auditor detection risk and
acceptable audit risk. Detection risk is determined by dividing acceptable audit risk divided by inherent
risk times control risk. Control risk is the risk related to weakness of internal control systems. Thus,
Artificial Intelligence by reducing the control risk, this automatically reduce audit risk, increase audit
quality, and therefore, reduce information risk for the users of the accounting information.

Moudud-Ul-Huq (2014) evidenced from Welch et al. (1998) study to introduce genetic algorithms as a
potentially useful application by auditor for modeling fraud decisions [23]. Lensberg et al. (2006) applied
genetic programming to bankruptcy prediction. This may also be useful in going-concern decisions when
auditor form opinion on client with unpredictable business future. Neural networks have been proposed as
a good application for a range of audit tasks. Due to their ability to model nonlinear relationships and
handle incomplete data, neural networks may be particularly helpful for risk assessment tasks.

Koh et al. (2004) suggested the use of neural networks and data mining for going-concern predictions.
They discovered that neural networks and decision trees are powerful tools in analyzing the complex,
nonlinear and interactive relationships involved in going-concern analysis [18]. Fuzzy systems may be
particularly useful for some audit tasks because of their inherent allowance of qualitative factors. For
materiality decisions, this may be much better than typical quantitative rules of thumb (Comunale et al.,
2005).

5 AI and Internal Control Systems

Moudud-Ul-Hug (2014) listed ten subjects of accounting topics that can be integrated with Artificial
Intelligence. Those subjects are credit authorizing and screening, mortgage risk analysis, financial and
economic analysis, risk rating of exchange traded, detection of regularities in security price movement,
prediction of default and bankruptcy, risk analysis of fixed income investment, detection of management
fraud, machine learning techniques to automatically identify characteristics of fraud and artificial
intelligence in marketing.

Using Bataller and Harris (2018), we provide a practical model of using Artificial Intelligence to be
applied for producing quality accounting information through mitigating weakness of internal controls in
almost every industry. The following matrix shows managers to think and consider what type of internal
control weakness can be automatically removed or augmented by Artificial Intelligence solutions.
Figure 2. AI model for internal control systems
 Source: Modified from Bataller and Harris (2018),

The matrix in figure 2 shows two dimensions of data and work complexity. Both of the two dimensions
should be considered from automation and improvement of internal control function perspectives.
Automation of routine tasks can improve overall productivity in producing accounting information and
effectiveness of internal controls.

Efficiency model characterizes with more toutine activities based on those rules, procedures and criteria
that make internal controls to be stronger. The main goal is to design those controls that satisfy cost-
benefit, quality performance and apply consistent in removing the weaknesses. In these Artificial
Intelligence solution, humans involve with monitoring the accuracy and how the rules need to deal with
the business conditions change. Machine learning capabilities should be applied for such rules. For
example, with a minimal amounts of human intervention, internal controls monitor online data validity by
applying codified knowledge and logic and make decision about accuracy and reliability of the data.

In expert model, Artificial Intelligence integrate judgmental tasks about how to remove the weakness of
internal controls. Exactly like a financial advisor, the model provides the best solution based on the reality
of the system condition and data, automated analysis and find the best solution robotically will be applied.
Such system is able to search vast data sources, and making inferences and provide recommendations
based on the knowledge. This model is similar to a medical diagnostic system which doctors find patient
solution by testing different medical intricacy, the doctor judgement finally will be reported. Therefore,
using natural language techniques and automated data analysis and searching, Artificial Intelligence will
produce solution(s) for the weakness of the internal controls without need of human to intervene and
judgement.
Effectiveness model suggests improvement in overall ability of the internal control systems to produce
reliable and relevant accounting information. This require to design the model based on a considerable
amount of knowledge about the business entity characteristics, the regulatory and legislative environment,
and industry specification. In this model, the system should assure that all transactions and accounts are
updated on ongoing base and automatically uses can access to the information through virtual agents.
Users of the information are increasingly using agents such as Google now on their smartphones.
Technologies such as natural language processing or speech recognition allow searching the internet and
finding the answers in form of a formatted report.

At the innovative model, Artificial Intelligence solution allows to generate new control methods,
objectives, and methodology by recommendation based on current control environment. An example of
how Artificial Intelligence can augment creative controls is an intelligent software that it can analysis a
control activity and then provide recommendations to increase the likelihood that the control will be at
risk. Also, the model should prevent those earning management techniques by analyzing transactions and
account balances. While humans make decision and act, technology helps identify alternatives and
optimize recommendation[2].

Risk and regulatory compliance should be considered in two models; efficiency and expert. One of the
major risk in today business is the risk of violating on not compliant with law and regulation. Artificial
Intelligence techniques such machine learning could be used to automatically detect and identify the risk.
Also, expert system could be used to find, analysis and generate solution using machine learning
techniques.

6 Conclusion
To conclude, this research has contributed to knowledge in the following ways. First, the issue of using
Artificial Intelligence in removing internal control systems weakness to produce quality accounting
information initiative raised by this study. Second, to achieve this, a joint-working of accounting
profession with Artificial Intelligence expertise to functionally developing software as well as
applications for specific internal control systems are inevitable collaboration. Using Bataller and Harris
(2018), we provide a practical model of using Artificial Intelligence to be applied for producing quality
accounting information through mitigating weakness of internal controls in almost every industry.
Efficiency model characterizes with more toutine activities based on those rules, procedures and criteria
that make internal controls to be stronger. In expert model, Artificial Intelligence integrate judgmental
tasks about how to remove the weakness of internal controls. Exactly like a financial advisor, the model
provides the best solution based on the reality of the system condition and data, automated analysis and
find the best solution robotically will be applied. Effectiveness model suggests improvement in overall
ability of the internal control systems to produce reliable and relevant accounting information. At the
innovative model, Artificial Intelligence solution allows to generate new control methods, objectives, and
methodology by recommendation based on current control environment.
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