Regulatory Bodies With Say Vis-à-vis Generative AI
Previously we looked at risks to an accountancy practice associated with the use of generative AI and considered measures for their mitigation. Now, in anticipation of governmental policy and recommendations and guidelines of the accounting industry regulatory and standards bodies for generative AI use, we enumerate the relevant standards and regulatory bodies. Accordingly, worldwide there are many such bodies, as the Securities and Exchange Commission (SEC,) the Financial Accounting Standards Board (FASB,) the Public Company Accounting Oversight Board (PCAOB,) American Institute of Certified Public Accountants (AICPA,) the Governmental Accounting Standards Board (GASB,) and Internal Revenue Services of the USA, the Institute of Chartered Accountants in England and Wales (ICAEW,) The Institute of Chartered Accountants of Scotland (ICAS,) Chartered Professional Accountants of Canada (CPA Canada,) and the International Accounting Standards Board (IASB,) amongst others. However, our emphasis will be the USA-based bodies with national scope that are concerned with publicly traded securities whose policies can have a bearing on generative AI use in the accounting industry. V
Law, Standards And Regulatory Bodies
The functions and responsibilities of these bodies range from oversight, to enforcement, to the establishment of standards, accreditation, licensing, and regulations. First, the US congress of the 1930s legislated the Securities Act of 1933, which created the means to regulate the securities markets, i.e., to ensure that buyers of securities receive complete and accurate information before they invest in securities; it was followed by the Securities Act of 1934, which created the Securities and Exchange Commission (SEC) to oversee the securities industry:
· The Securities Act of 1934 requires that audits and the preparation of financial statements for publicly traded companies be prepared by registered public accounting firms:
SEC. 10A. ø78j–1¿ AUDIT REQUIREMENTS.
(a) IN GENERAL. —Each audit required pursuant to this title of the financial statements of an issuer by a registered public accounting firm shall include, in accordance with generally accepted auditing standards, as may be modified or supplemented from time to time by the Commission—
(1) procedures designed to provide reasonable assurance of detecting illegal acts that would have a direct and material effect on the determination of financial statement amounts;
(2) procedures designed to identify related party transactions that are material to the financial statements or otherwise require disclosure therein; and
(3) an evaluation of whether there is substantial doubt about the ability of the issuer to continue as a going concern during the ensuing fiscal year. …
–Source: “Securities and Exchange Act of 1934.”
· The Securities and Exchange Commission (SEC) is a federal agency, a creation of the Securities Exchange Act of 1934 (aka., the Exchange Act or the 1934 Act,) that oversees the securities markets and enforces the securities laws inclusive of the Securities Act of 1933 and the Sarbanes-Oxley Act of 2002. The SEC has the authority to establish accounting standards for public companies, but it delegates this responsibility to the Financial Accounting Standards Board, The SEC also recognizes the Public Company Accounting Oversight Board. It requires that certified public accountants (CPAs) perform audits and prepare financial statements, such as balance sheets and income statements, for publicly traded companies.
· The Financial Accounting Standards Board (FASB) is a private sector organization that develops and issues the U.S. Generally Accepted Accounting Principles (U.S. GAAP,). In other words, it is the organization that establishes and improves financial accounting and reporting standards for public and private companies and not-for-profit organizations in the United States.
· The Public Company Accounting Oversight Board (PCAOB), created by the Sarbanes–Oxley Act of 2002, is a nonprofit corporation that regulates the auditing profession and sets auditing standards for public companies. It oversees the audits of US-listed public companies.
· The American Institute of Certified Public Accountants (AICPA) is a professional organization that represents the accounting profession and sets professional, ethical, technical, and auditing standards for CPAs; it was founded in 1887 as the American Association of Public Accountants (AAPA.) It also develops and grades the Uniform CPA Examination. In the 1970s, it gave up its responsibility for setting generally accepted accounting principles (GAAP) to, then recently formed, FASB.
· The Government Accounting Standards Board (GASB) is a private sector organization that establishes accounting standards for state and local governments. The GASB issues the Governmental Accounting Standards (GAS); it has a similar conceptual framework as U.S. GAAP, but it reflects the unique characteristics and needs of the public sector.
· The Internal Revenue Service (IRS,) an agency of the Department of the Treasury, is the federal agency that administers the Internal Revenue Code including the enforcement of tax laws and the collection of U.S. federal taxes.
· The Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of Comptroller of the Currency are federal agencies that regulate banks and savings institutions. They have the authority to prescribe accounting policies and practices for these entities, which may differ from U.S. GAAP in some aspects.
· The state boards of accountancy are state agencies that license and regulate professional accountants who practice in their jurisdictions. They coordinate through the National Association of State Boards of Accountancy (NASBA), a nonprofit association that promotes uniformity and quality in accounting regulation. The state boards of accountancy also adopt and enforce the Code of Professional Conduct issued by the American Institute of Certified Public Accountants (AICPA.)
Thus, there is a substantial number of US standards and regulatory bodies that can have a say in the use of generative AI in accounting. Their varied authority are derivatives of the securities acts of the 1930s. But, in the cases of the Internal Revenue Service, an agency of the Department of the Treasury, and the Federal Reserve System, the former manages government revenue, and the latter manages the US money supply, make loans and provide oversight to banks, and serving as a lender of last resort; the former gained its authority from the Act of Congress in 1789 and the latter from the Federal Reserve Act of 1913 and the Banking Act of 1933 (Glass–Steagall Act). Next time we update on the statements and recommendations made by some of these bodies concerning generative AI use. After which we begin our consideration of implementing AI (LLM System) in accounting.
–Richard Thomas
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Next, Part IV
