Machine Learning Improves Accounting Estimates

51 Pages Posted: 12 Oct 2018 Last revised: 19 Nov 2019

See all articles by Kexing Ding

Kexing Ding

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Baruch Lev

New York University - Stern School of Business

Xuan Peng

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Ting Sun

The College of New Jersey

Miklos A. Vasarhelyi

Rutgers Business School

Date Written: May 16, 2019

Abstract

Managerial estimates are ubiquitous in accounting: most balance sheet and income statement items are based on estimates; some, such as the pension and employee stock options expenses, on multiple estimates. These estimates are affected by estimation errors as well as by managerial manipulation, thereby adversely affecting the reliability and relevance of financial reports. We show in this study that machine learning can improve managerial estimates. Specifically, using insurance companies’ data on loss reserves (future claims) estimates and realizations, we document that the estimates generated by machine learning were superior to managerial estimates reported in financial statements in four out of five insurance lines of business examined. Our evidence suggests that machine learning techniques can be highly useful to managers and auditors in improving accounting estimates, thereby enhancing the usefulness of financial information to investors.

Keywords: machine learning, accounting estimates

Suggested Citation

Ding, Kexing and Lev, Baruch Itamar and Peng, Xuan and Sun, Ting and Vasarhelyi, Miklos A., Machine Learning Improves Accounting Estimates (May 16, 2019). Available at SSRN: https://ssrn.com/abstract=3253220 or http://dx.doi.org/10.2139/ssrn.3253220

Kexing Ding

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
NEWARK, NJ 07102
United States
9733535371 (Phone)

Baruch Itamar Lev

New York University - Stern School of Business ( email )

40 West 4th Street, Suite 400
New York, NY 10012
United States
212-998-0028 (Phone)
212-995-4001 (Fax)

HOME PAGE: http://www.baruch-lev.com

Xuan Peng

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

Ting Sun

The College of New Jersey ( email )

P.O. Box 7718
Ewing, NJ 08628-0718
United States

Miklos A. Vasarhelyi (Contact Author)

Rutgers Business School ( email )

180 University Avenue
Ackerson Hall, Room 315
Newark, NJ 07102
United States
973-353-5002 (Phone)
973-353-1283 (Fax)

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