By Chris Jenkins, CAE, SCACPA CEO
This article originally appeared in the Spring 2024 issue of the South Carolina CPA Report

Artificial intelligence (AI) is reshaping how businesses operate, and the accounting sector is no exception. For small CPA firms, AI offers enticing opportunities to streamline processes, boost efficiency, and enhance the quality of client services. In the realm of cybersecurity, AI-powered tools can provide an extra layer of defense, identifying potential threats with a speed and accuracy often exceeding traditional methods.

However, as with any transformative technology, it’s essential to acknowledge AI’s potential complexities and risks. Understanding both the promise and the potential pitfalls will position small firms to maximize the benefits of AI while safeguarding sensitive client data and preserving their reputation for trust and integrity.

The Potential Dark Side of AI
While the advantages of AI are compelling, it’s important to consider how this technology could be misused, particularly by malicious actors:

  • Sophisticated Social Engineering: AI-generated deepfakes (manipulated audio, video, or image-based content) and highly personalized phishing attacks blur the lines between real and fraudulent. Imagine a client receiving a phone call seemingly from their trusted CPA, the voice perfectly mimicked by AI, requesting urgent financial actions. CPAs must be extra vigilant and educate their clients on these threats.
  • Data Privacy Risks: AI applications often collect and analyze large datasets, including highly sensitive financial information. CPA firms must have robust data privacy policies, secure storage systems, and stringent access controls to comply with regulations and maintain client trust.
  • Algorithmic Bias and Inaccurate Decisions: AI models are only as good as the data they’re trained on. Inherent data biases or algorithm errors could lead to inaccurate financial reporting, skewed analysis, or discriminatory practices. For instance, an AI model trained to detect fraud might flag transactions from certain demographics more frequently, leading to unwarranted scrutiny of those groups.
  • AI as a Hacking Tool: Hackers are increasingly harnessing the power of AI to develop advanced malware, automate attacks, and bypass traditional security measures. CPA firms must be aware of this evolving threat and invest in AI-driven defenses.

The Security Imperative: Protecting Your Firm and Clients
Mitigating the risks associated with AI requires a proactive approach on several fronts:

  • Uncompromising Cybersecurity: Implement best practices like strong firewalls, multi-factor authentication, and regular software patching. Consider integrating AI-powered cybersecurity tools for an enhanced layer of defense. Invest in specialized platforms that can detect anomalous patterns often indicative of cyberattacks.
  • Focus on Ethical AI: Prioritize transparent and accountable AI development practices. Actively monitor AI systems to detect and address biases or errors, ensuring AI use aligns with professional ethics. Emphasize the importance of explainable AI – models where accountants can understand the reasoning behind decisions.
  • Educate Your Team: Staff are your first line of defense. Train employees to recognize phishing attempts, handle data responsibly, and understand the complexities of AI-related threats. Conduct regular cybersecurity awareness sessions and consider simulated attacks to test readiness.
  • Stay Compliant: Navigating the regulatory landscape around AI and data privacy is essential. Adhere to IRS Data Security Plan requirements and stay abreast of evolving legislation to ensure your firm maintains compliance. Be proactive in researching state-level regulations that might impact your practice.

Unlocking the Benefits of AI: A Practical Approach for CPA Firms
Despite the challenges, AI’s potential benefits for small CPA firms are significant:

  • Enhanced Fraud Detection: AI algorithms can analyze financial transactions and patterns to pinpoint anomalies that might otherwise go unnoticed. Consider partnering with a vendor specializing in AI-powered fraud detection for the financial sector, which will provide your firm with cutting-edge tools.
  • Streamlined Tax Processes: AI can automate data gathering, classification, and analysis, reducing errors in tax preparation. This frees up staff to focus on interpreting tax laws and providing strategic guidance to clients. Look for cloud-based tax solutions integrating AI for maximum efficiency.
  • Efficiency Gains Across the Board: AI can automate data entry, reconciliation, and routine report generation tasks. This allows accountants to focus on client relationships and value-added services, maximizing their time and expertise.
  • Data-Driven Advisory Services: AI can analyze large datasets to uncover trends, insights, and opportunities within clients’ financial data. CPAs can then offer proactive recommendations on tax strategy and cash-flow optimization or identify potential red flags for further investigation.

Integrating AI Responsibly: Achievable Policies for Small CPA Firms
Even small CPA firms can successfully adopt AI by focusing on a few core policies to guide their implementation. Remember, these policies should evolve as your firm’s AI use matures:

  • Combined AI Governance and Ethics Policy: This policy ensures the alignment of AI projects with your firm’s mission, ethical standards, and compliance obligations. It should include:
    • A clear definition of what constitutes acceptable AI use within your practice.
    • A streamlined approval process for new AI tools or initiatives.
    • Guidance on prioritizing transparency with clients about AI use, ensuring fairness, and avoiding bias in your AI applications
  • AI Data Management and Security Policy: This policy safeguards data and protects AI systems from potential threats. Focus on:
    • Adherence to regulations (IRS Data Security Plan, HIPAA, etc.) and best practices for data security throughout its lifecycle (collection, storage, use, disposal).
    • Secure data handling procedures, including encryption and strict access controls.
    • Integrating AI-specific risks into your existing cybersecurity plan and incident response procedures.
  • AI Monitoring and Review Policy: This ensures your AI tools continue to function properly and provide value. Key elements include:
    • Establishing regular reviews (e.g., annually) of AI use and its alignment with your firm’s goals.
    • Identifying key metrics to track the effectiveness of AI initiatives.
    • A mechanism for staff to provide feedback on AI tools, including flagging any concerns about accuracy or potential ethical issues.

Tips for Implementation in Small Firms:

  • Leverage Templates and Resources: Professional organizations and cybersecurity resources often provide policy templates that can be adapted for your firm.
  • Outsource When Needed: Consider engaging specialized consultants to assist in drafting complex policies or conducting initial risk assessments.
  • Prioritize Training: Provide staff with education and resources on AI risks, responsible data handling, and recognizing potential red flags related to AI systems.
  • Start Small, Scale Up: Begin with a manageable set of AI tools and a focus on the core policies outlined above. Expand your policy framework as your AI adoption becomes more sophisticated.

By adopting AI focusing on security, compliance, and ethical considerations, small CPA firms can position themselves at the forefront of innovation. Embracing AI responsibly will lead to increased efficiency, greater capacity for advisory services, and a stronger competitive edge within the ever-evolving accounting landscape.