Artificial Intelligence (AI) is everywhere. And companies that find new or better ways to use AI will create advantages for themselves, largely because it may give them the ability to scale things a reduced cost, and also because it may attract new clients who want this technology advantage.

In accounting, AI is most typically used to automate bookkeeping functions: recognizing payees and automatically categorizing transactions, matching transactions (ex. matching a purchase order to an  invoice), automatically producing certain financial reports, basic financial analysis. (AI isn’t yet good at complex financial analysis, but the ability to interpret data will continue to develop.)

Overall AI decreases the need for manual tasks such as inputting data and routine analysis of financial statements. That frees up accountants to do more specialized tasks. Think of it as automating the administrative tasks so the accountants can do the creative tasks.

I also use AI in my forensic accounting practice, although you might not recognize it as that. When I use software to perform data analytics (which has been around for a long time), I’m using AI. The data analytics are often centered around analyzing large sets of data to identify anomalies or patterns that are concerning. But we can also use AI to help link sets of data (think of matching transfers between accounts or matching bank transactions to underlying accounting system data).

Back to bookkeeping and related accounting tasks…

A company called ScaleFactor raised $100 million in venture capital for what it said was artificial intelligence that replaced accountants to do back office tasks like bookkeeping and payroll. Except the truth was that it didn’t have software doing the work, it had people in Austin (headquarters) or the Phillipines (outsourced) keying in the data. Customers report their books were riddled with errors and they had to fix it themselves.

In June, founder Kurt Rathmann announced the company was shutting down due to Covid-related losses. Half of the ScaleFactor’s 100 employees would be laid off immediately and by the end of summer only 10 people would be left to help wind things down. As of the end of 2019, the company was reporting $7 million in annual recurring revenue, but this year Rathmann said the pandemic caused customers to want more human relationships rather than automated services. Rathmann said ScaleFactor would be returning money to investors, but didn’t say how much.

But employees and customers say the business was a sham. They never built the software they promised, and instead focused on aggressive selling and raising capital. People who were supposed to function as “account managers” on the customer service team were actually the accountants who were entering data into the system.

Here’s what was supposed to happen: Customers would give ScaleFactor their financial documents and logins to software like Quickbooks or Xero. The ScaleFactor software would figure out how transactions should be categorized and reported. Users wouldn’t have to wait for monthly financial statements. They could log into the portal and see real-time updates.

What really happened: The software was not accurate, so employees of ScaleFactor would manually enter transactions and/or correct errors. The company hired The Outsourced Accountant in the Philippines to help. But the problems were chronic and it was difficult to keep up. Customers didn’t get the real-time data they were promised, instead getting monthly statements when the accountants would periodically enter data.

Customers say they were left with messes. Some lost money because of transactions that were initiated, others have wildly inaccurate books that must be sorted out and corrected.

The whole story in Forbes is fascinating. There were shenanigans more than a year ago (June 2019) when the company was trying to close on more funding. In January 2020 Rathmann announced to employees that the company was switching to a business model that would connect their clients to traditional accountants. Customers didn’t want to play, and the company is ultimately closing its doors.

AI can be used in accounting, but it is a developing area. Botkeeper is one company that is working in this area. Their services seem geared mostly to accounting firms that want to start automating some of the bookkeeping tasks. This seems to be the best of both worlds… using technology where you can, but supported by real people who are actively involved. As AI develops, I would expect that the amount of intervention required by humans would decrease as it relates to the routine bookkeeping tasks.

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