Financial situations - knowledge base of an expert

system
PhD.Eugenia IANCU*, PhD. Tudor COLOMEISCHI, PhD. Tiberiu SOCACIU,
PhD.Camelia BAESU
„Stefan cel Mare” University of Suceava, Romania

*Corresponding author: eiancu56@yahoo.it

Abstract
This paper is the result of theoretical and practical research done in the field of expert systems
applicable in economics. The main objective considered was to develop an expert system
architecture (which uses as knowledge base the data from the financial statements) and to test it on
the economy (in the sense of permanent and automatic updating of accounting knowledge which is
taken from the balance sheet and other accounting documents), considering this approach as a new
element in the design of ES. Obviously, the ES proposed does not ignore the knowledge base,
knowledge editors, inference engine and interfaces specific to any type of expert system.
The knowledge base is made up of knowledge (taken from various financial statements), which is
processed by the inference engine (the inference machine works with production rules).

Keywords – financial reports, the profitability of capitals, the basis of knowledge, financial
accounting decision, subroutines

1. Introduction
In a general sense, intelligent systems applied in economics represent that informational
technology capable of achieving a fundamental goal in the evolution of an economic entity.
Therefore, expert systems (ES) applied to economics have gradually individualized as a specific
and different area of application of ES in order to solve problems (we note generically a problem
of this type with PR) well defined in society.
In the Romanian literature there are several hundred of papers that provide a wide range of
relevant information in the field of expert systems applied to economic problems; these ES became
a separate category of intelligent systems with a wide range of applications in management,
marketing, accounting, finance and banks, stock exchanges, international finance, insurance and so
on [1], [2], [3], [12].
Most treaties and papers on expert systems present and describe, as appropriate, certain steps that
should be followed by the designer when he wants to build an ES for a problem (PR) well defined
[4]. Largely, it summarizes some knowledge acquisition techniques, connected or not to the steps
that should be followed in building an expert system.

2. Financial situations used in designing an expert system

The accounting information is provided by means of financial and accounting documents of
synthesis, which reflect clearly, accurately, fully and regularly the economic, financial and
patrimonial situation of the economic entity. These documents are called financial reports or
financial statements and they may be interim or annual. The European Accounting Directives will
meet the same document type invoked under the generic name of annual accounts. They are
developed by respecting some uniform rules of preparation, checking, approval and publication
according to regulatory accounting framework adopted by the entity.

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Financial statements have the goal to show the administration’s results performed by the entity's
management, including how it has used the resources that have been entrusted [8].
The objective of financial statements is to provide information about the financial position,
performance and changes in financial position of an entity, information that will help users in
making economic decisions.
Financial statements are intended to contribute to achieving accounting’s objective, that is, to
provide information to ensure a fair picture of the financial position, financial performance and
changes in financial position of the entity in order for this information to be used by internal and
external users. The preparation of financial statements is a complex aggregation of data in order to
calculate the economic - financial indicators regarding the state heritage and the outcomes [13].
The analysis of economic and financial activities based on the balance yakes into account the
followig:
1. analysis of performance indicators (indicators of performance and interpretation of rate
of return of total capitals used or net assets):
2. analysis of indicators of efficiency (efficiency is determined by the efficiency indicators
that are based on the transformation of capital assets on a circuit like: money-goods-
money).
3. liquidity ratio analysis;
4. analysis of debt or solvency indicators;
5. analysis of unitary indicators : of shares and dividends.
Profitability is the ability of companies to produce profit.
The profitability of capitals expresses the efficiency of using the capitals invested in the economic
business respectively, the ratio of the profit and the capital employed.
The economic profitability is the profitability through which it is expressed the efficiency of
existence and of use of economic assets, which is given by the rate of profit and economic assets.
Financial profitability is usually expressed by the ratio of the net results and the funds.
The ability to pay of the trader is the ability to extinguish fully and on time the payment
obligations becoming demandable to suppliers, employees, state budget, banks or other lenders
with funds available (their own, attracted, borrowed).
Solvency is the company's ability to pay matured the debts to its creditors. A trader is solvent when
the sum of its assets invested in fixed assets, current assets, outstanding debt, financial resources is
greater than or at least equal to total liabilities representing obligations to partners, employees,
state budget, bank.
Patrimonial solvency is an indicator that is determined by dividing the social capital assets to the
total of patrimonial elements including the social capital.
Financial liquidity is the ability of the economic unit to meet at the deadline, with the available
cash resources, the payment obligations.
Patrimonial liquidity is another indicator that is calculated as a ratio between the active
patrimonial components that can become in short time financial resources (availability in bank
accounts and cash, bonds, stocks, bills, quantities of materials, raw materials etc.) and passive
patrimonial elements property also on a short-term (bank loans maturing in the short term,
suppliers, salaries, taxes).
Financial creditworthiness is a form of trust that presented by a legal person when applying for a
loan. Financial creditworthiness is assessed based on the balance sheet and on the indicators that
express the quality of economic and financial activity of internal and/or external debt.
Creditworthiness means profitability and promptitude regarding extinguishing obligations and it is
important not only in the internal economic and financial relationships but also in the external
ones.
The balance sheet reflects the financial position of the entity (the ability to adapt to environmental
changes) with controlled economic resources (assets) and financing structure (equity, debt). For
preparing the balance sheet, the information from the definitive trial balance is systematized
according to certain criteria: degree of liquidity, settlement periods and economic nature of
specific balance sheet structures.
The loss and profit statement reflects the performance with the help of income (ability to generate
cash), costs (resource consumption period), profit / loss (efficiency or non-efficiency in resource

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use). Profit or loss statement is determined based on cumulative turnovers from the beginning of
the financial exercise for expenditure and revenue accounts. Standard form of profit and loss
account includes a number of indicators to measure financial results of the entity.
Statement of changes in equity reflects changes in financial position with details of the components
of equity (share capital, capital-related premiums, reserves, etc.). The statement of changes in
equity is a separate component of the annual financial statements including balance (initial and
final) and changes during the year, for each component of equity.
The cash flow statement reflects changes in financial position with cash flows (receipts and
payments) in operating activities, financing and investment. This allows assessment of changes in
net assets of the entity during the financial year, in the financial structure (including its liquidity
and solvency), in the entity's ability to influence the size and timing of flows in order to adapt to
the economic situation. The main objective of the cash flow statement is to reflect the influence of
the operating, investing and financing cash on an entity during a financial year.
Cash flow information provides users of financial statements a basis for assessing the ability of the
entity to generate cash and cash equivalents and the needs of the entity to utilize cash flows.
Notes must contain information about the basics of drawing, about specific accounting policies,
about disclosures required by IFRS – and which are not shown in the balance sheet, about profit
and loss statement, about statement of changes in equity and about cash flow statement.
Notes to the annual financial statements are crucial in grounding options shown by users of
financial-accounting information, both internal and external. Notes are intended to provide
financial – accounting information supplementary to those arising from other financial statement
items.

3. The concept of expert system

The basic structure of an expert system consists of a knowledge base for storing information about
the problem and its examination and an inference mechanism to handle the knowledge [6]. The
central element of intelligent processing through ES is the artificial reasoning, able to mimic
human reasoning. Expert systems replicate human reasoning on the knowledge of experts
available to them in some way, they possibly multiply this knowledge, they filter / rank them
according to their own rules and they explain the own lines of reasoning. Moreover, expert
systems can explain the reasoning process and they can handle levels of confidence and
uncertainties that can not be handled by traditional algorithms [9].
a) The basis of knowledge represents the knowledge of the domain (i.e. the whole human expertise
on a narrow issue) and is made up of the following:
• facts basis which receives data related to the problem proposed to be solved
by the expert system; it can be a problem in medicine, chemistry, biology, etc., e.g. for financial
diagnosis of the company on which we will focus later, we have data from accounting statements
(balance sheet, profit and loss account, cash flow, etc.), the facts basis is enhanced by the
functioning of the expert system;
• rules basis which reproduces the human expert reasoning and transfers its
expertise in a language accessible to the computer; these are called rules production;
b) The inference engine is the main component of the expert system, as this component realizes the
browsing of the fact basis according to some defined rules to reach the most intelligent solution to
solve the problem; practically, the inference engine performs reasoning that copy closely the
human reasoning; more precisely, the inference engine processes or handles successively the facts
that have been provided, respecting the required inference mechanism, mechanism provided by
production rules.
The reasoning specific to the inference engine can be realized using three distinctive working
methods:
1. Forward chaining, also called modus ponens (deductive reasoning), when going from the
initial facts basis and firing all rules whose preconditions are satisfied. The facts obtained by
reasoning are added to the facts basis (it is based on symptoms and then it is indicated the
diagnosis); it is also mentioned the mathematical formalism for this kind of reasoning, namely:
• Modus Ponens:

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 (p ∧ ( p→q)) →q [ 1]

where:
p- sentence or variable
q – conclusion
∧ - conjunction (AND)
→ involves

2. Backward chaining (regressive reasoning), when it is issued the hypothesis of a

conclusion and there are searched the rules confirming the hypothesis (the diagnosis is issued and
it is determined whether the symptoms exist); similarly, it is mentioned the mathematical
formalism for this kind of reasoning (keeping the previous notation):
• Modus Tollens:

(( p→q) ∧¬q) → ¬p [ 2]
where:
¬ - negation (the other symbols have been explained previously)
3. Mixed, when there is a goal, there are determined the deductible facts deductible, it is
firstly applied the inductive reasoning, which will require the user to specify the values of
unknown facts, but searchable, and then it is applied the deductive reasoning to deduce all
possibilities.
c) The system’s interface with the user is designed to ensure operational connection between
human expert and the information tool created, namely, it will allow further "constructive"
dialogue between the human expert and the ES; in the category of users of the future ES can enter,
if necessary, other persons than the human expert taking part in the design of the ES.
The objective of creating a generalized expert system suggests from the outset avoiding those
methods applicable to particular cases, for example to an economic segment, and those which
involve reliance on a set of specific data, which would require a separate approach in order to
obtain them.
Calculation of individual financial indicators has no meaning without comparison with their
previous values (trend analysis) or with the results of other companies in the same industries
(cross analysis).
As the complexity of problems that can occur particularly in the strategic decisions, often requires
the use of information in all spheres of activity and sometimes information related to adjacent
areas and the management decisions at tactical and operational level rely directly on information
related to resource management, we opted for the approach of various methods of analysis,
beyond the limitations imposed by the analysis based on the balance sheet and the profit and loss
account.
The auditing of the firms based on the evidence collected by calculating financial indicators and
expressing an opinion about the state of society can influence potential investors, who can invest
or withdraw to / from the capital of the company. Investors' decision involves the correlation
between current consumption and the future profits, from where the need for adequate, relevant
and comparable information.
The main reasoning to replace the human expert can be the following [7]:
ƒ to make expertise available after working hours and in any place of the
organization;
ƒ automation of a routine task which requires expert assistance;
ƒ the human expert is retiring or is deceased;
ƒ the human expert is very expensive;
ƒ the expertise is localized in dangerous environments for the human expert.
Human expert assistance in daily activity is a common situation in large companies; in such
situations when it is usually used the ES for tasks there are mentioned: assisting a doctor to
determine a diagnosis, assisting a specialist of a bank when calculating the creditworthiness of a
company to grant a loan, etc.

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To summarize the main conclusions regarding the concept’s architecture of the proposed expert
system, it is necessary to say explicitly that the issue of estimating a company's bankruptcy risk
has always been and remains a matter of the utmost complexity. Specifically, note that, in addition
to what the data reflect from accounting evidence, there are hundreds of other factors that
influence the organization in its route over time (maker’s experience, circumstances, crises, market
changes, etc.). In fact, existing data on the balance sheet and other accounting documents are
relatively synthetic data as previously they suffered dozens of manufacturing processes by the
accounting expert (organization is under the form of a tree on types of accounts, then on a balance
form to finally result in the balance sheet as a synthetic situation). In Figure 1 we present
graphically the accounting data being used and the location of proposed expert system.

Source: Iancu E. – Expert systems in accounting and management informatics, Ed. Politehnica,
2011
Fig. 1 The tree structure of accounting information and the proposed expert system

To describe the basic concept of an expert system, Giarratano Riley identifies three components:
the user providing facts and information to the expert system; knowledge base containing specific
information and interference engine that uses rules [9,10].
Applicable accounting expert systems are oriented mainly towards increasing the capacity of
examination of accounts offered by traditional systems. Thus, the expert systems can report,
analyze and even issue orders to redress any deviations from the optimal behavior.
In a study dedicated to identify the effect of using expert systems dedicated to individual topics,
Boer and Livni concluded that expert systems would have the potential to improve learning for
accountant students [5].
Expert systems of general interest for certified accountants are focused on the following directions
[2]:
- providing advice to managers;
- monitoring audit activities;
- analysis of activity;

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 - analysis of costs and reserves;
- preparation of annual reporting documents;
- diagnosis of enterprises’ condition.
The objective to which the expert system must respond to is to assist financial accounting decision
making and, consequently, assist top management of the company in an effort to predict the
condition of the business for the next years.
The functionalities met by the expert system are in a summary list the following:
¾ acquisition and processing of data necessary for the analysis, namely knowledge
from different data sources available in the information system of the organization;
¾ storing data / knowledge acquired in a database;
¾ aggregation of data and automatic performing of calculations necessary for
determining the value of the proposed analysis indicators;
¾ providing users with an application for managing business models.
As the proposed ES aims to have a generalized nature, its adapting to the specific of an
organization is an extremely important feature; this is because a good knowledge of the user’s
informational requirements is critical to the success of such a project. Inventorying informational
needs can be achieved in practice through individual and group interviews and is meant to delimit
the area of the information to be provided to decision makers and its classification in one of the
modules proposed for the overall scheme of the system. In this range of economic and financial
information users, managers / decision makers are ranked in the first place in the category of
internal users. In case of a decision support system with generalized character, such step is meant
to ensure optimal configuration of the models basis according to users' requirements.
The procedure for creating / updating the knowledge base for the expert system involves the
following order of operations:
1. procedure of creating/updating variables;
2. procedure of creating/actualizing of purposes;
3. procedure of creating/actualizing of qualifiers;
4. procedure of creating/actualizing expression/formula type rules;
5. procedure of creating/actualizing of rule type rules.
Other procedures relate to the import of economic data from a file, making viewing reports of
calculations after import, display reports of the tables’ contents, validation-compilation and
execution procedure generated by the module - generator of expressions and formulas, validation-
compilation and execution procedure of "subroutines" generated by the RULE module and the
procedure for viewing / displaying the results of execution rules.

Conclusions
For accounting, as well as for the overall management, expert systems held interest due to
performances held in processing knowledge - data and information - especially in terms of quality
accuracy and efficiency, facilitating reaching objectives. Viable implementations already exist
both in management accounting and financial accounting [14], [15].
On the other hand, it must be concluded that various tools which are more and more efficient,
offered successively by researchers have a major and undisputed role to promote human decision
maker in the exercise of his approaching near an absolute knowledge.
The interest in expert systems technology and their application register a continuous upward trend,
although the funds allocated in this area are small.
In recent years there has been a maturation of the entire field of artificial intelligence that has
evolved as an active and evolving discipline. Currently, most research topics are targeted to
Artificial Intelligence and Expert Systems in particular.
Sector development trends aimed at improving knowledge acquisition through use of genetic
algorithms and use of intelligent agents in implementing Internet applications (intelligent search
engines and browsers for the Internet) and in electronic commerce (intelligent customers or
intelligent vendors, methods based on artificial intelligence for inter-agent communication).
Starting with the main objective of work there is a number of conclusions:

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 - once identified the economic problem that would be solved by an ES (in this case,
positioning of the company) is necessary to identify the main sources of acquisition of knowledge
regarding the problem;
- there was advanced the idea of working with certain knowledge, the main source of
acquision being the financial statements;
- the synthesis performed on the applicability of the ES on economic issues leads to the
conclusion that it is an interdisciplinary research topic as it requires expertise from several areas
(systems engineering, economics, accounting, business administration, etc.);
- taking into account the nature of the economic problem, it follows that the problem
concerned is best solved by an expert system since every business organization has certain
characteristics which give uniqueness; the propose ES would be based on data from financial
reports.

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