Accounting Expert Systems Applications

by Carol E. Brown

Introduction
Summary of Systems used by CPA firms in their practices
Audit Expert Systems
- Risk Advisor - Audit Risk Analysis (Coopers & Lybrand)
- Flow Eval - Audit Risk Analysis and Internal Control Analysis (Ernst & Young)
- Audit Planning Advisor - Audit Work Program Development (Deloitte & Touche)
- Planet - Audit Planning (Price Waterhouse)
Tax/Audit Expert Systems
- World Tax Planner - International Tax Planning Expert System (Deloitte & Touche)
- RIC Checklist - (Price Waterhouse)
- ExperTAX - Corporate Tax Planning (Coopers & Lybrand)
Other Tax Expert Systems
- PEAT/1040 - Projection and Expert Analysis Tools/1040 (KPMG Peat Marwick)
- Andrew Tobias' TaxCut - formerly Ask DAN About Your Taxes (Legal Knowledge Systems)
IRS Expert Systems
Management Accounting Expert Systems
- EXXON's System - to Record the Transfer of Inventory and Equipment
- Discovery - TRW's System for Detecting Services Theft
- Debit Card Fraud Project - Screening for Fraud (Security Pacific Bank)
- PRA System - Passenger Revenue Accounting System (Northwest Air)
- Arthur D. Little's Expert System for Variance Analysis
- Digital Equipment Corporation's Expert Systems
- BUCKS - Business Control Knowledge System (Digital Equipment Corporation)
- Capital Investment System - (Texas Instruments Corporation)
- Project Analysis for Capital Equipment Expenditures - (PACEE) (by Azure Software, Inc.) originally for Tyler Manufacturing, Inc.
- Paperless Management - formerly Retail Operations Intelligence (Park City Group) originally for Mrs. Fields' Cookies
- CALTREC (California Travel Expense Claim System) - (State of California)
- Credit Advisor - (General Motors Acceptance Corporation - GMAC)
- Case-Based Appraiser - (not yet in commercial use)
Articles on Expert Systems used in Accounting Practice

Introduction

Expert systems are used extensively in the practice of accounting

By CPA firms in their auditing and tax practices
By the Internal Revenue Service
By many companies for internal auditing and management accounting tasks
Accounting expertise is now for sale in the form of expert systems

Summary of Systems used by CPA firms in their practices

Risk Advisor

Audit Risk Analysis
Coopers & Lybrand

In use since 1989
Potential inherent audit risk assessment
- Highlights
- Quantifies
Over 100 engagement team members and firm experts participated in development
Five Modules:
- CLIENT FINANCIAL DATA MODULE
  enter manually or directly from files
- ON-LINE PEER DATA MODULE
  peer company information
  via telecommunications capabilities
- QUESTIONNAIRE AND OTHER CLIENT INFORMATION MODULE
  qualitative client information using questionnaires
- ANALYZER / QUESTIONNAIRE
  organizes the information
  collects additional information
  generates audit issues
- REPORT MODULE
  formats reports

For additional information on Risk Advisor see:

Graham, Lynford E.; Jeffrey Damens and George Van Ness, (1991) "Developing Risk Advisor: An Expert System for Risk Identification," Auditing. 10(1) pp. 69-96.

Flow Eval

Ernst & Young
Audit Risk Analysis and Internal Control Analysis

Front end for EY Decision Support
In use since 1990
Flow Eval:
- assist the auditor in drawing flow charts of a client's accounting systems
- identify where controls in the client's accounting systems should be
- assists in evaluating the adequacy of current controls
- suggest where additional controls might be needed
Example:
- IF supporting document set not reviewed before a check is signed
  (purchase order, receiving report, and vendor invoice)
- AND no alternative controls that meet the same control objectives
- THEN the additional control should be added to the client's system of internal controls
Audit Planning Advisor
Audit Work Program Development Deloitte & Touche
- Rule-based audit planner
- Incorporates over 1000 questions grouped by audit area
- Assumes the user is an audit in-charge
- The questions address areas of concern and risk
  - general (e.g. materiality)
  - special (e.g. foreign currency or sales returns)
- Generates the first draft of a detailed audit program
- Editing facilities for refining the audit program
- Two methods of tracing the system logic are available:
  - BROWSE facility to review the questions and answers
  - RISK-TASK MATRIX audit task / addressed risks
Planet
Price Waterhouse
- Task: strategic and detailed audit planning
- Technology: Rule-base expert system
- System: The system includes 450 risk factors (e.g. foreign currency risk, price fluctuation, etc) which are mapped to audit assertions. Error types allow finer distinction in audit assertions and are used to select appropriate tests (e.g. foreign currency risk increases risk associated with proper amount assertion, but not all tests which address proper amount address foreign currency risk). Planet generates an easily modifiable audit plan.
- Benefit: Identification of risks is more comprehensive and plans generated are guaranteed to address areas of greatest risk. Process is more efficient, significant time savings are expected.
- Status: Worldwide field test late 1993, deployed to replace APEX
References:
Delisio, Jeff; Maureen McGowan and Walter Hamscher (1993) "PLANET: An expert system for audit risk assessment and planning" The Fifth Annual Conference on Intelligent Systems in Accounting, Finance and Management, November 11-13, 1993, Stanford University.

Anonymous, (1993) "PLANET" Price Waterhouse Technology Centre Tour, Menlo Park, CA: Price Waterhouse.

World Tax Planner
International Tax Planning Expert System Deloitte & Touche (Touche Ross)
- In use since 1985
- Used by international tax experts,
  500 people in over 65 offices in 30 countries
- Purpose is mathematical calculations and text retrieval -- suggestions but not decisions
- Domain: location of intermediate holding companies appropriate corporate structures structuring international acquisitions
- Optimization - brute force for limited possibilities based on the amount of tax ranks paths default values modified by tax experts
- "Intelligent" Database
  - database search functions
  - over 800 double tax treaties
  - tax rates etc for 185 countries
  - text retrieval system for relevant notes
RIC Checklist
Price Waterhouse
- In use since 1988
- Domain is Regulated Investment Companies
- PW has significant number of regulated investment company clients
- Assists in the audit of regulated investment companies
  - determine if a company meets the requirements for qualification as a RIC
  - looks at the standard audit checklist for a mutual company
  - provides some assistance with the tax accrual
- A file for automatic transfer to a Lotus spreadsheet is produced, that spreadsheet called and calculated data automatically sent back to the expert system
ExperTAX
Corporate Tax Planning
Coopers & Lybrand
- In Use since 1986
- Started with 2000 rules -
  Grown to over 3000 rules
- Purpose is gathering and data review for corporate tax planning auditing the deferred tax accrual
- Animated or intelligent questionnaire
- PC-based, uses QShell with KBMS
- Data Gathering Improvements -
  - productivity of staff accountants has increased
  - information is higher quality
  - training process for staff accountants has accelerated
- Analysis Function Improvements
  uncovers and describes tax accrual and planning issues and alternatives
- Efficiency and effectiveness of the managers
  expertise of specialists in particular
  tax and auditing areas is included
- Insurance ExperTAX in use since 1988 (over 2000 rules)
- Oil & Gas ExperTAX in use since 1989
For additional information on ExperTAX see:
Shpilberg, David and Lynford E. Graham, (1986) "Developing ExperTAX: An Expert System for Corporate Tax Accrual and Planning," Auditing. 6(1), pp. 75-94.

Shpilberg, David; Lynford E. Graham, and Harry Schatz, (1986) "ExperTAX: An Expert System for Corporate Tax Planning," Expert Systems, 3(3), pp. 136-150.

PEAT/1040
Projection and Expert Analysis Tools/1040
KPMG Peat Marwick
- In use since 1987
- Structure: two companion modules
  - EXP1040 main rule-based portion
  - CALC1040 Symphony spreadsheet program
- Equipment: PC, EXSYS shell
- up to six tax scenarios in CALC1040
- CALC1040 produces a text file with the appropriate symbolic references and amounts for use by EXP1040
- one scenario for analysis by EXP1040 conclusions are based on data from the CALC1040 worksheet additional questions asked by EXP1040
- 1987 Size:
  - 50 rules embedded in CALC1040 worksheet
  - 400 rules in EXP1040
Andrew Tobias' TaxCut
formerly Ask DAN About Your Taxes
Legal Knowledge Systems
- Available since 1988 for 1987 Taxes
- 1040 tax preparation and individual tax planning
- Used by non-tax professionals and small tax practitioners
- Equipment: PC
- Structure:
  - Series of Mini-Expert Systems
  - Facsimiles of tax forms
  - Calculation features like a spreadsheet
- On-line expert advisor includes explanations
- Later years include tax planning features
- Form 1040: name, filing status, exemptions, wages, tips, etc., tax refunds (state & local), IRAs, alimony, other income, and excess FICA
- Other: Itemized Deductions, Interest and Dividends, Sale of a Home, Child Care Credit, Moving Expense, AND MORE
IRS Expert Systems
Examples of IRS Expert Systems Projects
- Tax Return Issue Identification Expert System
  Identify issues on individual income tax returns with good audit potential
- Reasonable Cause Determination Expert System
  Assist IRS employees in the process of deciding whether reasonable cause exists for granting penalty abatement
- Estate Tax Return Perfection and Classification
  Identify likely cases for audit and assist examiners in perfecting Estate Tax Returns
- Employee Plans Determination Expert System
  Assist in determining whether a proposed pension plan meets regulations
- Link Analysis System for Criminal Investigation
  Assist in criminal investigation by examining large amounts of data and creating a diagram of how the items can be linked
- Automated Underreporter Expert System
  Screen tax returns that have been flagged by the current system as having missing 1099 income
- Tax Technician Assistant
  Assist IRS employees in processing tentative carryback claims from Form 1045
EXXON's System
to Record the Transfer of Inventory and Equipment
Transaction Recording Expert Systems
- The Computing Environment
  - Integrated Capital and Operations Reporting (ICOR)
  - ICOR is a mainframe-based system with eleven subsystems and over 1,000 modules
- Materials Subsystem
  - Global database for inventories and fixed assets in numerous field and warehouse locations
  - Embedded system with three knowledge bases
- Results of Expert System Use
  - Records 1,500 transactions a night
  - Handles 90 % of transactions without human intervention
  - If the system does not have all the information needed, requests help from an accountant
  - Accounts for transactions in a day or two that previously required more than a month to record
  - Eliminates a processing bottleneck
- Reported Benefits
  - Manpower savings - reduced staffing because fewer human processors are needed
  - Improved cash flow - quicker processing of the transfers enables EXXON to bill joint operation participants sooner
  - Better decisions - more timely recording of transfers leads to better decisions
For additional information on Exxon's ICOR expert system see:
Brown, Carol E. and Mary Ellen Phillips, "Expert Systems for Management Accountants," Management Accounting, (January 1990), pp.18-23.

Discovery
TRW's System for Detecting Services Theft
Screening for Fraud
- TRW provides credit information about individuals to credit granting subscriber institutions
- Hackers, private investigators, and criminals have succeeded in acquiring passwords and accessing instructions
- Monitors 400,000 inquiries per day from 120,000 locations without interfering with customer use
- Dynamically searches for recurring patterns in user inquiry data
  Three types of patterns evolve over time
  - A daily pattern for each customer
  - A global pattern based on accumulated daily customer patterns
  - An industry pattern (some industries)
- If current activity varies from normal user behavior, patterns are compared to daily inquiry activity to determine if unauthorized use likely
- Differentiates normal changes from those that may represent fraudulent use - parameters adjusted to more carefully screen accounts suspected of misuse
- Provides information on use patterns
  The customer use patterns determine the direction and evolution of service access
Debit Card Fraud Project
Security Pacific Bank
Screening for Fraud
- Increasing fraudulent use of debit cards at ATM and point-of-sale locations - recovery of stolen funds is usually difficult if not impossible
- Detects and prevents automatic teller machine fraud
- Developed with a commercial expert shell on a small computer - in use since April 1988
- Linked to bank's data bases on two mainframe computers
- Augments existing automatic controls with expertise of its fraud investigators
- Used investigative expertise to develop preventive expertise
- Estimated savings in first two months of use equaled the development costs
- The system reaches one of three conclusions
  - Fraud is likely - electronic activity is blocked
  - Fraud is possible and further investigation is necessary - referred to human with a report
  - Fraud is unlikely - no action is necessary
PRA System
(Passenger Revenue Accounting System)
Northwest Air
- Northwest Air wanted to verify 100% of the tickets it issues
- Northwest Air issues over 20 million tickets per year
- Ticket pricing is extremely complicated
  Over 100,000 fare changes a day
- Before the expert system was developed
  - Only 2% to 5% of the tickets issued were verified
  - Manually verifying was not cost effective above 5%
- Conventional programming was
  - Too complex
  - Too difficult to maintain once developed
- Knowledge base is easily updated for fare changes using 19 ticket price factors (e.g. Advanced reservations, Minimum and maximum stay, Days of the week for travel)
- Verifies between 50,000 and 60,000 tickets a night
- Scans and interprets the actual ticket stubs collected at the gate with image processing
- The customer information captured is valuable for marketing decisions
Arthur D. Little's Expert System for Variance Analysis
- Variance analysis is more critical as profit margins narrow, competition increases, technology advances occur, or market demand changes
- Arthur D. Little developed the system for a high-tech company with $75 million in sales
- The expert system analyzes variances for budget line items and groups
- Using its internal model of the company, the system
  - determines the significant variances
  - provides an explanation without additional user input
- Two types of integration
  - Tight coupling with a commonly used spreadsheet - integrated with a budgeting spreadsheet at the menu-bar level
  - Loose coupling with accounting records - integrated with the accounting system through file transfers
Digital Equipment Corporation's Expert Systems
- Over 140 expert systems in use
- XCON assists in the configuration of VAX computers
- Annual estimates
  - XCON saves $20 million in manufacturing costs
  - its entire set of expert systems saves more than $100 million
BUCKS
Business Control Knowledge System
Digital Equipment Corporation
- Division Evaluation
- Assists controllers and managers in performance analysis for regional division projects and consulting activities
- Evaluates
  - Net operating revenue compared to budget
  - Business contribution margin to budget
  - Business contribution margin to net operating revenue
- Provides a short report of analysis and conclusions
- Explains reasoning behind analysis and recommendations
- In use since 1986 in Europe
- Considers
  - environmental differences
  - resource differences between a country's regions
  - long-run consequences of short-run changes
- Parameters can be set for a particular situation
- Integrated with accounting systems
- Users can send comments about BUCKS directly to the experts in charge of maintenance
- Benefits of BUCKS
  - Discovers trends and underlying factors often overlooked
  - Saves managers' time
  - Improves the quality of managers' decisions
Capital Investment System
Texas Instruments Corporation
- Annual acquisitions exceed $600 million
- Used worldwide by over 190 managers
- The knowledge base uses the most experienced employees' expertise
- Menu and question driven - parameters permit customization
- Easy for the employees to use - illogical data not permitted by built-in controls
- Prepares reports for acquisition of equipment decisions
  Provides a full investment presentation package of 17 forms that includes:
  - Pay back & Cash flow analysis
  - An opinion of whether or not the investment is worthwhile
  - Describes necessary installation conditions
  - Legal requirements including environmental impact statements provided
- Benefits
  - Most experienced employees now impact decisions
  - Report preparation was considered an unpleasant task by most of the company's engineers
  - Reports frequently prepared by new employees
  - Prior to the expert system, important capital investment decisions were based on data provided by the least-experienced employees
  - Reduces report preparation time
  - Prevents unneeded equipment expenditures
- The system is self-sustaining, requiring only an hour a month to maintain
Project Analysis for Capital Equipment Expenditures
(PACEE)
by Azure Software, Inc.
originally for Tyler Manufacturing, Inc.
- PACEE is a PC software program that
  - Helps user evaluate both the financial and the competitive impact of various investment options
  - Asks the right questions, organizes the information, and skips no steps - leads the user through the myriad of information that should be considered
  - Focuses attention on the cost drivers and lets the computer do the number crunching
  - Is easy to use even if the user does not understand the financial analysis techniques
  - Prepares a management decision-support report
- PACEE analysis is divided into
  - Suitability: a calculated rating by combining criteria weights and scores
  - Capacity: an overriding factor in making choices
  - Financial comparisons of pay back, accounting rate of return, internal rate of return and net present value
Reference:
Brown, Carol E. and Mary Ellen Phillips (1994) Expert Systems for Management Accountants, Institute of Management Accountants, forthcoming.

Paperless Management
(formerly Retail Operations Intelligence)
by Park City Group originally for Mrs. Fields' Cookies
- Paperless Human Resource Management
  - Expert Evaluator (formerly Interviewing)
  - Interactive Trainer
  - Skill Appraisal
- Paperless Labor Management
  - Sales Forecasting & Business Modeling
  - Labor Scheduler
  - Time and Attendance
  - Quality, Service & Cleanliness
- Paperless Inventory and Production Management
  - Perishable Inventory Extension
  - SKU Inventory Extension
  - Recommended Ordering
  - Invoice Matching
  - Production Planner
  - Perishable Inventory Expert System
- Paperless Workflow Management
  - FormMail
  - Messaging Plus
  - On-line Manuals
- Paperless Cash Management
  - Cash Sheet & Sales Reporting
  - Cash Concentration
- Paperless Expense Management
  - Repair and Maintenance
  - Recurring Expenses
  - Lease Management
  - General Ledger Expert System
- Paperless Management Reporting
  - Flash Viewer
  - P&L User's Model
  - Operations Expert System
CALTREC (California Travel Expense Claim System)
State of California
- Task. Employee Expense Verification
- Shell. ESE runs on IBM 370
- Background. The state of California employs 200,000 people in 200 departments who belong to 20 different bargaining units. Total claims processed each year is approximately 400,000. Error rate on claims was estimated to be between 50% and 80%
- System. CALTREC automates the process of creating and validating employee travel expense claims. The system uses a centralized computing system to have control over changes.
- Results. The system performs well and is accepted as providing correct answers. The system provides claimant with a list of required signatures, receipts and documentation necessary for approval.
- Other Benefits. The system has inspired new and better ways to do other phases of the claim process.
Reference.
Bartman-Gatt, Allyson, (1991) "Expert Systems in Data Processing: California Travel Expense Claim System". Innovative Applications of Artificial Intelligence. Vol. 3, Smith & Scott (Eds.) Menlo Park, CA: AAAI Press. pp. 321-35.

Brown, Carol E. and Mary Ellen Phillips (1994) Expert Systems for Management Accountants, Institute of Management Accountants, forthcoming.

Credit Advisor
General Motors Acceptance Corporation (GMAC)
- Task. Credit Approval - Automobile Loans
- Reasoning method. Neural network
- Shell. A modified neural network shell was used. GMAC will not say which shell because of pending patents.
- Developer. Credit Advisor was developed in house by the General Motors family of companies.
- Background. GMAC is a finance company associated with General Motors.
- System. Two Credit Advisor systems use neural networks. One for evaluating credit of customers leasing automobiles and one for customers purchasing automobiles from dealerships. The neural networks are embedded in credit scoring systems. The neural networks compliment an algorithmic system for credit scoring that has been in place since 1985.
  Development on these two systems started in 1987 and the neural network portion of the systems were deployed in 1992. The long lag between beginning development and deployment was partially due to upper management's reluctance to deploy the systems. Addressing all the concerns of management related to the use of neural network technology took about two years. Some of management's concerns related to legal ramifications e.g. nondiscrimination and turn-down. The neural network had to be trained to work backwards.
  Management believed the ideal system should be able to automatically approve at least 20% but before the neural networks were developed they were getting less than that. With the neural networks they are now at 30% automatic approval.
- Benefits. Credit Advisor has approximately 800 users. Credit Advisor automatically approves a greater percentage of applications than the credit scoring systems it replaced. The initial objective set for the systems was met and exceeded. No cost benefit analysis beyond that has been done yet. The system has not been in operation long enough to determine with certainty that the credit approvals made by the system were good choices. Because of the length of the loans at least 48 months must pass before validity is determined.
  The company considered savings in person hours for making credit decisions, reduced training costs, less write-offs, and a lower requirement on internal auditor effort for both compliance and test of internal controls. Standardizing the process reduces the effort of internal audit staff. Estimates of time saving were very accurate. Estimates of training costs were not accurate. GMAC continues to monitor the costs and benefits of Credit Advisor.
Reference:
Brown, Carol E. and Mary Ellen Phillips (1994) Expert Systems for Management Accountants, Institute of Management Accountants, forthcoming.

Case-Based Appraiser
(not yet in commercial use)
Task. Real estate property appraisal
Reasoning. Case-based reasoning
System. Case-Based Appraiser selects ten similar properties for possible comparison then narrows those down to the three most comparable properties.
- An estimate of the value for the current case is made by taking the actual value of the comparable properties and adjusting for features that are not exact matches.
- Frames are used to describe the properties sold during a certain period. A weight is assigned to each element of comparison indicating importance.
- Both exact matches are required for some elements and partial matches are acceptable for others.
- The ten cases with the highest weighted total match score are selected for comparison.
- Each comparator property is adjusted for each factor that does not match within a prespecified limit.
- The three best matching properties are weighted by a "comfort factor" based on the number of adjustments made.
- A weighted average of the adjusted value of the three best matches determines the final appraisal.
References.
Gonzalez, Avelino J. and Raymond Laureano-Ortiz, (1992) 'A case-based reasoning approach to real estate property appraisal' Expert Systems With Applications, Vol. 4, #2, pp. 229-246.

Brown, Carol E. and Mary Ellen Phillips (1994) Expert Systems for Management Accountants, Institute of Management Accountants, forthcoming.

Articles on Expert Systems used in Accounting Practice
- "The Use of Advanced Information Technology in Audit Planning"
  International Journal of Intelligent Systems in Accounting, Finance & Management, Volume 1, Number 3, 1992, Pages 187-193, David Murphy and Carol E. Brown.
- "Need an Expert? Ask a Computer"
  Journal of Accountancy, November 1991, Volume 172, Number 5, Pages 91-93, Mary Ellen Phillips and Carol E. Brown.
- "Expert Systems for Internal Auditing"
  The Internal Auditor, August 1991, Volume 48, Number 4, pages 23-28.Carol E. Brown and Mary Ellen Phillips.
- "Expert Systems in Public Accounting: Current Practice and Future Directions"
  Expert Systems with Applications: An International Journal, June 1991, Volume 3, Number 1, Pages 3-18, Carol E. Brown.
- "Expert Systems for Management Accountants"
  Management Accounting, January, 1990, Volume LXXI Number 7, pages 18-23, Carol E. Brown and Mary Ellen Phillips.
Introduction to Artificial Intelligence and Expert Systems
Copyright 1993, 1994, 1995 by Carol E. Brown, Oregon State University, (brownc@bus.orst.edu) All rights reserved, Reproduced by special permission. Photocopy Permission
Page last updated December 18, 1994

Accounting Expert Systems Applications

Table of Contents

PRA System

Digital Equipment Corporation's Expert Systems