Data Analytics for Accounting

Professor Yanfeng Xue

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 3. Perform the
1. Data 2. Master the
Test and
Analytics Data
Address Results

4. Communicate 5. The Modern 6. Audit

Results Environment Analytics

Overview of
the Semester 7. 8. Financial
Management Statement 9. Tax Analytics
Analytics Analytics

11. Project
10. Project
Chapter
Chapter (Basic)
(Advanced)

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Data Analytics for Accounting
• What is data analytics?
• How does data analytics affect business?
• Why does data analytics matter to accountants?
• What is the data analytics process?
• What data analytic skills do accountants need?
• Hands on example of the IMPACT model.
• Computerizing business information: XBRL

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Data Analytics and Big Data

• Data Analytics is the process of evaluating data with the

purpose of drawing conclusions to address business questions.
Effective Data Analytics provides a way to search through large
structured and unstructured data to identify unknown
patterns or relationships.

• Big Data refers to datasets which are too large and complex to
be analyzed traditionally.

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The 3V ’s of Big Data
• Volume refers to the size of data
• It’s estimated that 2.5 quintillion bytes of data is created each day, and as a
result, there will be 40 zettabytes of data created by 2020. As a result, it is
now not uncommon for large companies to have Terabytes – and even
Petabytes – of data in storage devices and on servers
• Velocity refers to the speed of data processing
• Some data will come in in real-time, whereas other will come in fits and
starts, sent to us in batches.
• Variety refers to number of different types
• Some are in traditional database files – e.g., excel, csv and access. Some
needs to be presented in non-traditional forms, like video, text, pdf, and
graphics on social media, as well as via tech such as wearable devices.

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How Does Data Analytics Affect Business
According to PWC’s annual global CEO Survey:

• 85% of CEOs put a high value on Data Analytics.

• 80% of CEOs place data mining and analysis as the second-most
important strategic technology.
• Business analytics tops CEO’s list of priorities.
• Data Analytics could generate up to $3 trillion in value per year.

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 How Does Data Analytics Affect Accounting?
Auditing
• Expand beyond sample-based testing to include analysis of entire populations of relevant data.
• Enhance audit quality.
• Allow expanded services and added value to clients. External auditors stay engaged beyond audit.
Financial Reporting
• Better estimates (A/R collectability, write-downs, etc.)
• Better understanding of the business environment
• More timely reporting
Taxes
• Companies develop sophisticated tax planning strategies.
• Managers understand tax consequences of international transactions, investment, mergers and
acquisitions.
• The organization understands tax tables and other tax data to aid compliance.
Managerial Accounting

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Types of Data Analytics Accountants Do
1. Descriptive analytics = “What is happening?”
This is used most often and includes the categorization and classification of
information
2. Diagnostic analytics = “Why did it happen?”
Diagnostics are used to monitor changes in data. Accountants regularly analyze
variances, calculate historical performance, and conduct forensics investigation.
3. Predictive analytics = “What’s going to happen?”
Data are used to assess the likelihood of future outcomes. Accountants are
instrumental in building forecasts and identifying patterns that shape those
forecasts.
4. Prescriptive analytics = “What should happen?”
Accountants use the forecasts they create to make recommendations for future
growth opportunities or, in some cases, raise an alert on poor choices.
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The IMPACT Model for Data Analytics
Identify the
questions
1. Identify the questions
2. Master the data Track Master the
3. Perform the test plan outcomes data

4. Address and refine results

5. Communicate insights
6. Track outcomes
Communicate Perform test
insights plan

Address and
refine
results
Step 1: Identify the Questions
Understand the business problems that need to be addressed.
• Are employees circumventing internal controls over payments?
• Are there any suspicious travel and entertainment expenses?
• How can we increase the amount of add-on sales of additional goods to our
customers? Are our customers paying us in a timely manner?
• How can we predict the allowance for loan losses for our bank loans?
• How can we find transactions that are risky in terms of accounting issues?
• Who authorizes checks above $100,000? How can errors be identified?
Step 2: Master the Data
Know what data are available and how they relate to the problem.
• Internal ERP systems
• External networks and data warehouses
• Data dictionaries Transactions Customer
• Extraction, transformation, and loading Transaction ID [PK] Customer ID [PK]

• Data validation and completeness Customer ID [FK] Name

• Data normalization Date Address

Description City
• Data preparation and scrubbing
Amount State
Enterprise
Resource
Planning
system

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Step 3: Perform the Test Plan
Select an appropriate model to
find a target variable.
• Classification
• Regression
• Similarity matching
• Clustering
• Co-occurrence grouping
• Profiling
Step 4: Address and Refine Results
• Identify issues with the analyses, possible issues, and refine the
model
• Ask further questions
• Explore the data
• Rerun analyses
Step 5: Communicate Insights
• Communicate effectively using
clear language and
visualizations:
• Dashboards
• Static reports
• Summaries
Step 6: Track Outcomes
Follow up on the results of the analysis.
• How frequently should the analysis be performed?
• Have the analytics changed?
• What are the trends?
Accountants need to be able to:
• Articulate business problems.
• Communicate with data scientists.
• Draw appropriate conclusions.
• Present results in an accessible manner.
• Develop an analytics mindset.
As well as be comfortable with:
• Data scrubbing and data preparation
• Data quality
• Descriptive data analysis
• Data analysis through data manipulation
• Define and address problems through statistical analysis
• Data visualization and data reporting
Choose the right Data Analytics Tools
• Based on Gartner’s magic
quadrant, Microsoft and Tableau
provide innovative solutions.
• The Microsoft Track includes
Excel, Power Query, Power BI,
and Power Automate
• The Tableau Track includes
Tableau Prep Builder, Tableau
Desktop, and Tableau Public

EXHIBIT 1-4 Gartner Magic Quadrant for Business Intelligence and Analytics Platforms Source: Sallam, R.
L., C. Howson, C. J. Idoine, T. W. Oestreich, J. L. Richardson, and J. Tapadinhas, “Magic Quadrant for
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Business Intelligence and Analytics Platforms,” Gartner RAS Core Research Notes, Gartner, Stamford, CT
(2020).
 Microsoft Data Analytics Tools
Tool Excel Power Query Power BI Power Automate
Large datasets
Collect data from
Small datasets Large datasets Advanced
multiple sources
Data tables Data joining visualization
Good for Robotics process
PivotTables Data cleaning Dashboards
automation
Basic visualization Data transformation Presentation

Windows/Mac/Onli
Platform Windows Windows/Online Online
ne

EXHIBIT 1-5 Microsoft Data Analytics Tools

© McGraw Hill 20
 Tableau Data Analytics Tools
Tool Tableau Prep Builder Tableau Desktop Tableau Public
Large datasets
Large datasets
Data summarization Analyze and share public
Advanced visualization
Good for Data joining datasets
Dashboards
Data cleaning
Presentation
Data transformation
Platform Windows/Mac/Online Windows/Mac/Online Windows/Mac/Online

EXHIBIT 1-6 Tableau Data Analytics Tools

© McGraw Hill 21
Hands-on Example of the IMPACT
Model
Let’s use the Pivot Table function in Microsoft Excel to conduct the analysis. Pivot
table is an easy way to summarize data in Excel.
Step 1: Identify the Question
• Assume you want to get a loan to pay off some credit card debt.
• LendingClub is a peer-to-peer lender that connects individual lenders
with borrowers.
• Use the IMPACT model to determine whether you’re likely to get a
loan.
• “Given my borrower profile, can I expect LendingClub to extend a loan
to me?”
• What other questions might you ask?
Step 2: Master the Data
• LendingClub is a U.S.-based, Data available:
peer-to-peer lending company, • Approved loans (LoanStats)
headquartered in San Francisco,
California. LendingClub • Rejected loan stats
facilitates both borrowing and (RejectStats)
lending by providing a platform
for unsecured personal loans
between $1,000 and $35,000.
The loan period is for either 3 or
5 years.
Step 2: Master the Data – Loan Summary
• Personal loans have
grown since 2011.
The majority are for
refinancing.

Exhibit 1-7 LendingClub Statistics by Exhibit 1-8 LendingClub Statistics by

purpose Reported Loan Purpose
Source: Accessed December 2020, Source: Accessed December 2020,
https://www.lendingclub.com/info/statistics.action https://www.lendingclub.com/info/statistics.action
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Step 2: Master the Data
– Rejected Stats Data Dictionary
RejectStats File Description
Amount Requested The total amount requested by the borrower
Application Date The date which the borrower applied
Loan Title The loan title provided by the borrower
Risk_Score For applications prior to November 5, 2013 the risk score is the borrower's FICO score. For applications
after November 5, 2013 the risk score is the borrower's Vantage score.
Debt-To-Income Ratio A ratio calculated using the borrower’s total monthly debt payments on the total debt obligations,
excluding mortgage and the requested LC loan, divided by the borrower’s self-reported monthly income.
Zip Code The first 3 numbers of the zip code provided by the borrower in the loan application.
State The state provided by the borrower in the loan application
Employment Length Employment length in years. Possible values are between 0 and 10 where 0 means less than one year and
10 means ten or more years.
Policy Code publicly available policy_code=1
new products not publicly available policy_code=2
Exhibit 1-9 2007 to 2012 LendingClub Data Dictionary for Declined Loan Data
Source: LendingClub

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Sample data from RejectedStats
Amount Application Loan Title Risk_Score Debt-To- Zip Code State
Employment
Requested Date Income Ratio Length
1000 5/26/2007 Wedding Covered but 693 10% 481xx NM 4 years
No Honeymoon
1000 5/26/2007 Consolidating Debt 703 10% 010xx MA < 1 year
11000 5/27/2007 Want to consolidate my 715 10% 212xx MD 1 year
debt
6000 5/27/2007 waksman 698 38.64% 017xx MA < 1 year
1500 5/27/2007 mdrigo 509 9.43% 209xx MD < 1 year
15000 5/27/2007 Trinfiniti 645 0% 105xx NY 3 years
10000 5/27/2007 NOTIFYi Inc 693 10% 210xx MD < 1 year
3900 5/27/2007 For Justin. 700 10% 469xx IN 2 years
3000 5/28/2007 title? 694 10% 808xx CO 4 years
2500 5/28/2007 timgerst 573 11.76% 407xx KY 4 years
3900 5/28/2007 need to consolidate 710 10% 705xx LA 10+ years
1000 5/28/2007 sixstrings 680 10% 424xx KY 1 year
3000 5/28/2007 bmoore5110 688 10% 190xx PA < 1 year
1500 5/28/2007 MHarkins 704 10% 189xx PA 3 years

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Step 3: Perform the Test Plan
Identify three predictors and perform the analyses to predict whether
we receive a loan:

1. The debt-to-income (DTI) ratios and number of rejected loans

2. The length of employment and number of rejected loans
3. The credit (or risk) score and number of rejected loans
Step 3: Perform the Test Plan
• For DTI, we set buckets:
• High = debt > 20% of income
• Mid = debt is 10-20% of income
• Low = debt < 10% of income

• Here we see a Pivot Table with

results on RejectStats
Step 3: Perform the Test Plan
• For employment length, we set
buckets on number of years.
• Here we see a PivotTable with
results on RejectStats
Step 3: Perform the Test Plan
• For credit score, we set buckets:
• Excellent: 800-850
• Very good: 750-799
• Good: 700-749
• Fair: 650-699
• Poor: 600-649
• Very bad: 300-599
Step 4: Address and Refine Results
Further analysis using
PivotTable:
Step 4: Address and Refine Results
• From the PivotTable analysis, we find that of the rejected loans:
• 82% have either very bad, poor, or fair credit
• 48% had a high DTI ratio
• 76% had a credit history of one year or less
Step 4: Address and Refine Results
• If we look at interactions of
credit score & DTI &
employment length in a Pivot
Table, we see they are fairly
predictive.

• Only 89 out of the 645,414 loan

applications were rejected from
the top buckets from each
predictor.
Step 5: Communicate Insights
• The PivotTables provide a simple visual. Additional visualizations or
tools may provide quick analysis by those evaluating the loans.

• Another goal is to share the results in plain English:

• “If I have good credit, low debt-to-income, and a long employment
length, it is very likely that my loan will be accepted.”
Step 6: Track Outcomes
• Extending this analysis to future periods will help us determine
whether these factors hold true or if there is some shift in the future.
• We attempt to use past performance to predict future results, but
that may not always hold true. When factors change, we repeat the
IMPACT cycle.
What is XML?

§ XML stands for:

eXtensible Markup Language

§ It is the universally accepted method of

exchanging information

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How does it work?
• XML gives meaning to information through the use of tags
<Customer>
<Name>Lisa Watson</Name>
<Company>Edgar Online Inc.<Company>
<Title>Director</Title>
<Age>32</Age>
</Customer>

• Tags are defined by industry consortiums

• Each industry’s standard tags are commonly referred to as a taxonomy
What is XBRL?
• XBRL stands for eXtensible Business Reporting
Language
• XBRL is a freely available XML based language for
exchanging business information
• XBRL is not about establishing new accounting
standards but enhancing the usability of the ones that
we have by making them easy to digitize
• XBRL will not require additional disclosure from
companies to outside audiences, but to add tags to the
information they provide.
XBRL Taxonomy
• The XBRL standard is maintained by XBRL international
• XBRL US, the US-based organization of XBRL International,
supports the implementation of XBRL in the United States through
the development of the digital dictionary (taxonomy)
• The US GAAP Financial Reporting Taxonomy is a list of computer-
readable tags in XBRL that allows companies to label precisely all
the data in financial statements and related footnotes.
• The tags allow computers to automatically search for and assemble data
so those data can be readily accessed and analyzed by external users.
• SEC requires all companies using US GAAP provide financial
statements in XBRL format

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FASB XBRL Taxonomy
http://xbrlview.fasb.org/

Examples of tags defined by the FASB’s XBRL taxonomy

• Operating income (loss) = OperatingIncomeLoss
• Gross margin = GrossProfit
• Sales revenues = SalesRevenueNet
• Cost of goods sold = CostOfGoodsAndServicesSold

Why do we need to know this?

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What is XBRL Used For?
• An XBRL-based financial statement is a digitally enhanced version
of paper-based financial statements, which include the balance
sheet, income statement, statement of equity, statement of cash
flows, and the notes to the financial statements as well as the
accountant's report.
• XBRL documents can be easily digitized, so it can be easily
prepared and utilized. There are many tools available to use XBRL
documents.
• Other potential XBRL applications include tax returns, regulatory
filing, general ledger, authoritative literature, and management
reporting.
Benefits of XBRL for Financial Statements
With XBRL, information will be entered once and the same
information will be "rendered" as
• a printed financial statement,
• an HTML document for a Web site,
• an EDGAR filing file for SEC,
• a raw XML file, or
• a specialized reporting format such as periodic banking and
other regulatory reports.
How to identify XBRL tags from the FASB’s
taxonomy:
1. Open a web browser, and go to xbrlview.fasb.org.
2. Click the + next to US GAAP (2022).
3. Click the ALL (Main/Entire) option, and then click Open to load the taxonomy.
4. Navigate through the financial statements to determine which accounts you need.
The name of the XBRL tag is found in the properties pane next to “Name.” For
example, the tag for Total Assets can be found by clicking + Statement of Financial
Position [Abstract], + Statement [Table], + Statement [Line Items], + Assets [Abstract],
+ Assets, Total, as shown in Exhibit 1-1A in the next page. You may also use the search
function.

Note: Be careful when you use the search function. The tag you see in the results may
appear in the wrong statement. Double-click the tag to expand the tree and show
where the account appears. 44
EXHIBIT 1-1A Browse the XBRL Taxonomy for Financial Fact Tags

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