Use Case | Application of Generative AI for Financial Report Validation

Application of Generative AI for Financial Report Validation

Overview:

Financial report validation is a critical process that ensures accuracy and compliance with accounting standards and regulations. A generative AI can automatically analyze financial reports in PDF format, identify inconsistencies, verify regulatory compliance, and generate clear recommendations to improve the quality and accuracy of documents.

How Does Generative AI Work in This Use Case?

1. Upload of Financial Report:
   • The user uploads the financial document in PDF format, which may include balance sheets, income statements, or cash flow reports.
2. Extraction of Financial Information:
   • Technique Used:
     The model uses text processing to extract key data, such as income, expenses, assets, and liabilities. If the document is scanned, OCR (Optical Character Recognition) is applied.
   • Result:
     A structured representation of the financial content that can be evaluated.
3. Automatic Analysis:
   • The AI analyzes the extracted data and verifies:
     • Data Consistency: Are the values in different sections of the report correctly calculated and reconciled?
     • Regulatory Compliance: Does the report include the elements required by standards such as IFRS, GAAP, or local regulations?
     • Key Financial Ratios: It calculates metrics such as liquidity, solvency, and profitability to evaluate financial health.
     • Common Errors: It detects missing data, calculation errors, or inconsistencies between sections.
4. Comparison with References:
   • Technique Used:
     Compares the reported values with the company’s historical financial data or industry standards to identify significant deviations.
   • Result:
     Highlights unusual trends or areas that require further analysis.
5. Report Generation:
   • The AI generates a report that:
     • Highlights sections of the report that meet the standards.
     • Identifies problem areas, such as inconsistencies or non-compliance.
     • Provides clear recommendations for correcting the issues found.

Practical Example:

Scenario:
A financial manager wants to validate a balance sheet and an income statement before presenting them to the board of directors.

Simplified Process:

1. Upload of Document:
   • The manager uploads both reports to the system.
2. Model Analysis:
   • Verifies calculations: Ensures that total assets match the sum of liabilities and equity.
   • Assesses consistency: Checks that reported net income matches the increase or decrease in cash in the cash flow statement.
   • Regulatory review: Confirms that all required items according to IFRS or local standards are included.
3. Analysis Results:
   • Balance Sheet: Detects that total assets do not match the sum of liabilities and equity, indicating an error in the classification of current assets.
   • Income Statement: Identifies that the cost of sales is not detailed enough, which could raise questions during the presentation.
4. Generated Report:
   • Compliant: The majority of the balance sheet is well-structured.
   • Errors Detected:
     • Discrepancy in the sum of assets.
     • Lack of detail in the cost of sales.
   • Recommendations:
     • Review and correct the classification of current assets.
     • Add a breakdown of the cost of sales in the income statement.

Benefits of Using Generative AI for Financial Report Validation:

1. Time Savings:
   Automated analysis replaces manual review, significantly reducing the time needed to validate reports.
2. Increased Accuracy:
   It detects calculation errors, inconsistencies, and omissions that could go unnoticed in manual reviews.
3. Regulatory Compliance:
   Automatically ensures that reports comply with applicable regulations, reducing legal risks.
4. Comparative Analysis:
   Identifies trends or significant deviations by comparing the reported values with historical data or industry benchmarks.
5. Clear Report Generation:
   Provides actionable recommendations that help correct issues before reports are reviewed by external auditors or presented to management.

Generated Report Summary:

• Reports Analyzed: 2
  • Balance Sheet: Detected an error in the sum of total assets.
  • Income Statement: Missing a breakdown of the cost of sales.

Recommendations:

• Review and correct the classification of current assets to balance the sheet.
• Add a detailed breakdown of costs in the income statement for greater clarity.

Conclusion: Generative AI transforms financial report validation into an automated, accurate, and efficient process. By detecting inconsistencies, verifying regulatory compliance, and generating detailed reports, it enables financial teams to present solid and reliable reports, reducing risks and strengthening strategic decision-making.