Artificial intelligence in accounting: GAAP's “FAS133”

• DOI: http://doi.org/10.1002/jcaf.22407
• Author: Louis P. Le Guyader
• Published date: 01 July 2020
• Date: 01 July 2020

OTHER

Artificial intelligence in accounting: GAAP's “FAS133”

Louis P. Le Guyader

Department of Accounting and Finance,

Southeastern Louisiana University,

Hammond, Louisiana

Correspondence

Louis P. Le Guyader, Department of

Accounting and Finance, Southeastern

Louisiana University, Hammond, LA.

Email: lleguyad@aol.com

Abstract

Artificial intelligence (AI) is the necessary element to ensure that the most complex

modern accounting rules are implemented correctly. This is particularly true when

accounting interacts with increasingly sophisticated capital markets activities. The

last 20 years' of accounting rulemaking and the dictates of regulators have ensured

a need for AI. With user-friendly AI solutions, reporting entities will not shy away

from business practices because they fear they cannot account for them correctly.

AI will remain an opportunity and challenge to the accounting profession.

KEYWORDS

accounting, artificial intelligence, derivatives

Artificial intelligence (AI) was the necessary ingredient needed

to implement GAAP's “FAS133”rule on derivatives.

1

This

new AI requirement came as a shock! FAS133 was the regula-

tors' accounting solution to a market problem with derivatives

and it was too complex for manual implementation!

The accounting rules proved to be impossible to implement

without systems support in the larger and more sophisticated

hedging programs of SEC registrants and some private entities.

Regulators effectively demanded the creation of those AI solu-

tions. They allowed FAS133 to proceed after a 1-year delay so

that a minimal AI or “systems solution”would be available.

The “FAS133-AI”experience has become a model for how

accounting can use AI solutions, and regulators may demand

them. The “FAS133-AI”story is also an excellent illustration of

the various levels of functionality to which AI solutions can be

developed in both the capital markets and accounting contexts.

AI solutions in this context can range from accepting external

data feeds, automating mathematical functions, producing full

financial reports, and even making decisions. This article

reviews the FAS133 experience as a critical AI “case in point.”

1|REGULATORY BACKGROUND

This AI story is one reflecting how a regulatory push in a

given field can fuel the development of a new generation of

automation and AI.

1.1 |Derivative debacles fuel the need for

FAS133

In the 1980s and early 1990s, the U.S. capital markets faced

a number of derivative debacles. Losses from soured deriv-

ative positions were staggering and unexpected. Account-

ing was blamed for part of this problem. A governance

group was convened to study the matter under the leader-

ship of Paul Volcker, the former Chairman of the Federal

Reserve, as the Group of 30. One of their recommendations

was to “improve accounting for derivatives”(Group of

30 Reports, 1993).

The accounting community's response was to help the

SEC and the FASB formulate FAS133. This process took

more than half a decade and the results were not perfect. The

initial rule responding to the recommendation required

amendments that amendment process continues to this day.

“FAS133”is the well-known label for the FASB's rule

on “Accounting for Derivative Instruments and Hedging

Activities”(FASB, 1998). The 1-year delay was accom-

plished by issuing FAS137 (FASB, 1999). Despite the cost

of regulatory deliberations, FAS133 was stopped cold

because of this missing element, an AI solution.

In some cases it was not even a question of cost—the AI

system cost versus the staffing cost for manual solutions.

Too much of the rule's functionality was outside accountants'

standard toolkits. Without the various capabilities of AI

Received: 1 June 2019 Accepted: 8 July 2019

DOI: 10.1002/jcaf.22407

J Corp Acct Fin. 2020;31:185–189. wileyonlinelibrary.com/journal/jcaf © 2019 Wiley Periodicals, Inc. 185