Data Analytics for Accounting

Richardson | Teeter | Terrell 3e

Chapter 1: Data Analytics in

Accounting And Business

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 Chapter Objectives
• Define Data Analytics.
• Understand why Data Analytics matters to business.
• Explain why Data Analytics matters to accountants.
• Describe the Data Analytics Process using the IMPACT cycle.
• Describe the skills needed by accountants.
• Explain how to translate common business questions into fields
and values.

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 Learning Objective 1-1

What is data analytics?

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 Data Analytics and Big Data
Data Analytics is the process of Big Data refers to datasets
evaluating data with the which are too large and complex
purpose of drawing conclusions to be analyzed traditionally.
to address business questions.
Effective Data Analytics
provides a way to search Remember the 4V ’s:
through large structured and Volume refers to size
unstructured data to identify Velocity refers to frequency
unknown patterns or
relationships. Variety refers to different types
Veracity refers to the data
quality.
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 Q: How does having more data around
us translate into value for a company?

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 Learning Objective 1-2

How does data analytics

affect business?
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 By the numbers:
• 85% of C E Os put a high value on Data Analytics.
• 86% of C E Os place data mining and analysis as the second-
most important strategic technology.
• Business analytics tops C E O’s list of priorities.
• Data Analytics could generate up to $2 trillion in value per year.

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 Q. How could data analytics be used
to reduce a company’s overtime
costs?

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 Learning Objective 1-3

How does data analytics

affect accountants?
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 How does data analytics affect
auditing?
• Data analytics enhances audit quality.
• Data analytics enables enhanced audits, expanded services,
and added value to clients.
• External auditors stay engaged beyond the audit.

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 How does data analytics affect
management accounting?
• Data analytics enhances cost analysis.
• Data analytics enables better decision-making.
• Data analytics enables better forecasting, budgeting,
production, and sales.

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 How does data analytics affect
financial reporting?
• Accountants make better estimates of collectability, write-
downs, etc.
• Managers better understand the business environment through
social media.
• Analysts identify risks and opportunities through analysis of
Internet searches.

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 How does data analytics affect tax?
• 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.

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 Q. What patterns might an auditor find
through data analytics?

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 Learning Objective 1-4

How does data analytics

make an IMPACT?
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 The IMPACT model
Identify the questions. Exhibit 1-1 The IMPACT Cycle
Master the data.
Perform the test plan.
Address and refine results.
Communicate insights.
Track outcomes.

Access the text alternative for slide images.

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 IMPACT Model
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?

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 IMPACT Model
Step 2: Master the Data
• Know what data are available and how they relate to the
problem.
• Internal E R P systems.
• External networks and data warehouses.
• Data dictionaries.
• Extraction, transformation, and loading.
• Data validation and completeness.
• Data normalization.
• Data preparation and scrubbing.
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 IMPACT Model
Step 3: Perform the Test Plan
• Select an appropriate model to find a target variable.
• Classification.
• Regression.
• Similarity matching.
• Clustering.
• Co-occurrence grouping.
• Profiling.

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 IMPACT Model
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.

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 IMPACT Model
Step 5: Communicate Insights
• Communicate effectively using clear language and
visualizations:
• Dashboards.
• Static reports.
• Summaries.

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 IMPACT Model
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?

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 Q. Let’s say we are trying to predict
how much money college students
spend on fast food each week. What
would be the response, or dependent,
variable? What would be examples of
independent variables?

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 Learning Objective 1-5

What data analytic skills do

accountants need?
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 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.

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 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
Access the text alternative for slide images. 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 Business Intelligence and Analytics Platforms,” Gartner RAS Core
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 Microsoft Data Analytics Tools
Tool Excel Power Query Power BI Power Automate
Large datasets
Large datasets Collect data from
Small datasets Advanced
Data joining multiple sources
Data tables visualization
Good for Data cleaning Robotics process
PivotTables Dashboards
Data automation
Basic visualization Presentation
transformation

Windows/Mac/
Platform Windows Windows/Online Online
Online

EXHIBIT 1-5 Microsoft Data Analytics Tools

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

EXHIBIT 1-6 Tableau Data Analytics Tools

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 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.

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 Q. What other skills might be useful in
performing Data Analytics?

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 Learning Objective 1-6

Hands-on Example of the

IMPACT Model

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 Hands On Example 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?

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 Hands On Example Step 2:
Master the Data – LendingClub
LendingClub is a U.S.-based, Data available:
peer-to-peer lending company, Approved loans (LoanStats).
headquartered in San
Francisco, California. Rejected loan stats
LendingClub facilitates both (RejectStats).
borrowing and 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.

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 Hands On Example Step 2:
Master the Data – Loan Summary
Personal loans have
grown since 2011.
The majority are for
refinancing.

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

by purpose by Reported Loan Purpose
Access the text alternative for slide images. 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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 Hands On Example 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 F ICO 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 L C 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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 Hands On Example Step 2:
Master the Data – Sample Data
Amount Application Loan Title Risk_Score Debt-To-Income Zip State Employment Length
Requested Date Ratio Code
1000 5/26/2007 Wedding Covered but No Honeymoon 693 10% 481xx NM 4 years
1000 5/26/2007 Consolidating Debt 703 10% 010xx MA < 1 year
11000 5/27/2007 Want to consolidate my debt 715 10% 212xx MD 1 year
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

Exhibit 1-10 2007 to 2012 Declined Loan Applications (DAA Chapter 1-1 Data) Dataset
Source: LendingClub

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 Hands On Example Step 3:
Perform the Test Plan - Analyses
• Perform three analyses to predict whether we receive a loan:
• The debt-to-income (D T I) ratios and number of rejected loans.
• The length of employment and number of rejected loans.
• The credit (or risk) score and number of rejected loans.

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 Hands On Example Step 3:
Perform the Test Plan - Pivot
For D T I, we set buckets:
High = debt > 20% of income
Mid = debt is 10 to 20% of
income
Low = debt < 10% of income
Here we see a PivotTable with
results on RejectStats

Exhibit 1-11 LendingClub Declined Loan

Applications by D T I (Debt-to-Income)
Access the text alternative for slide images. Microsoft Excel

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 Hands On Example Step 3:
Perform the Test Plan – Buckets
For employment length, we set
buckets on number of years.
Here we see a PivotTable with
results on RejectStats

Exhibit 1-12 LendingClub Declined Loan

Access the text alternative for slide images. Applications by Employment Length (Years
of Experience)
Microsoft Excel
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 Hands On Example Step 3:
Perform the Test Plan - Scores
For credit score, we set
buckets:
Excellent: 800 to 850
Very good: 750 to 799
Good: 700 to 749
Fair: 650 to 699
Poor: 600 to 649
Very bad: 300 to 599
Exhibit 1-13 The Count of LendingClub Rejected
Loan Applications by Credit or Risk Score
Access the text alternative for slide images.
Classification Using PivotTable Analysis
Microsoft Excel

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 Hands On Example Step 4:
Address and Refine Results - Summary
• From the PivotTable analysis, we find that of the rejected loans:
• 82% have either very bad, poor, or fair credit
• 48% had a high D T I ratio
• 76% had a work history of one year or less

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 Hands On Example Step 4: Address
and Refine Results – Interactions
If we look at interactions of
credit score & D T I &
employment length in a Pivot
Table, we see they are
somewhat predictive.
Only 365 of the 645,414 loans
were rejected with from the top
buckets from each.
Exhibit 1-15 The Count of LendingClub
Declined Loan Applications by Credit Score,
Debt-to-Income, and Employment Length
Access the text alternative for slide images. Using PivotTable Analysis
Microsoft Excel
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 Hands On Example Step 4: Address
and Refine Results - Predictions
If we look at interactions of
credit score & D T I &
employment length in a Pivot
Table, we see they are
somewhat predictive.
Only 365 of the 645,414 loans
were rejected with from the top
buckets from each.

Exhibit 1-13 The Average Debt-to-Income Ratio

(shown as a percentage) by Credit (Risk) Score for
Access the text alternative for slide images. LendingClub Declined Loan Applications Using
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PivotTable Analysis 43
Microsoft Excel
 Hands On Example 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 history, it is very likely that my loan will be
accepted.”

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 Hands On Example 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.

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 Q. Would you expect loans from
California to be more or less likely
approved? How could you test that?

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 Chapter 1 Summary
With data all around us, businesses and Eight data approaches address different ways of
accountants are looking to Data Analytics to testing the data: classification, regression,
extract the value that the data might possess. similarity matching, clustering, co-occurrence
grouping, profiling, link prediction, and data
Data Analytics is changing the audit and the way
reduction. These are explained in more detail in
that accountants look for risk. Now, auditors can
chapter 3.
consider 100 percent of the transactions in their
audit testing. It is also helpful in finding the Data analytic skills needed by analytic-minded
anomalous or unusual transactions. Data accountants are specified and are consistent with
Analytics is also changing the way financial the IMPACT cycle, including the following:
accounting, managerial accounting, and taxes
Develop an analytics mindset.
are done at a company.
Data scrubbing and data preparation.
The IMPACT cycle is a means of doing Data Data quality.
Analytics that goes all the way from identifying Descriptive data analysis.
the question, to mastering the data, to performing Data analysis through data manipulation.
data analyses and communicating results. It is Define and address problems through statistical
recursive in nature, suggesting that as questions data analysis.
are addressed, new important questions may Data visualization and data reporting.
emerge that can be addressed in a similar way.
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