For Audit Practitioners

What This Tool Concept Does

Proof-of-concept tool designed to automate financial statement reconciliation validation using mathematical constraints. Think of it as "equation-checking" for accounting. Currently in pilot testing phase with audit practitioners.

Typical audit task: Manually trace equity rollforward, verify OCI components, check M&A impacts

Time: 8-12 hours per client per quarter

Error rate: ~5% (human fatigue, missed disclosures)

Tool concept (pilot testing): Automated validation against IFRS/GAAP standards

Time (pilot results): 2 minutes

Error rate (initial tests): <1% (consistent taxonomy application)

Mathematical Foundation

For practitioners who want to understand the math:

Why A=L+E Always Balances - Kirchhoff's Law proves this is mathematical necessity, not convention
Simplest Example - 2-minute equity bridge walkthrough ($1,000 → $1,150)
Complete Source Taxonomy - All 51 IFRS/GAAP terms that change equity

You don't need to understand the math to use the tool, but if you're curious why it works, these pages explain the foundations.

Use Cases

> IPO Readiness Context: These validations are critical for pre-IPO companies. Auditors of IPO-bound companies face compressed timelines and heightened scrutiny. This tool concept is designed to flag equity issues 12+ months before S-1 filing, potentially avoiding last-minute restatements that delay IPOs by 6-12 months. (Industry guidance: "66% of companies improve book-close speed by 50%+ during IPO prep")

1. Equity Bridge Validation

Problem: Equity must reconcile quarter-over-quarter, but components often don't sum correctly.

IPO Use Case: Pre-filing readiness check (T-12 months before S-1)

Traditional approach:


Opening Equity: $1,000M
+ Net Income: $50M
+ OCI: ???  (need to find in footnotes)
- Dividends: $10M
- Buybacks: $25M
= Closing Equity: $1,050M

Wait... $1,000 + $50 - $10 - $25 = $1,015 ≠ $1,050
Where's the missing $35M?

Framework approach:


python scripts/validate_equity_bridge.py --cik 0000320193 --period 2024Q3

Output:


✓ Net Income reconciled: $50.2M (IAS 1.106)
✓ OCI Components:
  - FVOCI investments: $28.5M (IFRS 9.5.7.1)
  - FX translation: $6.3M (IAS 21.52)
  - Actuarial gains: $0.2M (IAS 19.93)
✓ Owner Transactions:
  - Dividends: $10.0M (IAS 1.107)
  - Treasury stock: $25.0M (IAS 32.33)
⚠ Gap detected: $35.0M unaccounted

Likely causes:
1. Missing IFRS 9 FVOCI tag (check us-gaap:OtherComprehensiveIncomeAvailableForSaleSecurities)
2. NCI adjustment not disclosed (check IFRS 10 consolidation note)

Time saved: 6-8 hours of manual tracing

2. Negative Equity Validation

Problem: Client reports negative parent equity. Is this fraud or legitimate structure?

IPO Use Case: PE-backed companies often have negative equity from leveraged buyouts. Framework proves to underwriters that structure is legitimate, not distressed. (Numeric, 2025: "IPO process is tedious, complex, and lengthy...accounting costs often exceed expectations")

Case Study: Boeing (2024-2025)

Parent Equity: -$3.3B (negative!)
Total Equity: $14.2B (positive)
Concern: Negative equity often signals distress or fraud

Framework Analysis:


python scripts/demo.py --ticker BA --frequency quarterly

Finding:

✅ Leverage identity passes: A = L + E holds ($155B = $158B - $3B)
✅ Equity bridge reconciles: Buybacks > cumulative earnings
✅ No fraud detected: Legitimate aggressive capital return policy

Interpretation: Boeing's negative parent equity is structural (too many buybacks), not fraudulent. Framework prevents false positive.

3. M&A Detection

Problem: Company acquires subsidiary but doesn't fully disclose impact on equity.

Case Study: Interactive Brokers (IBKR)

NCI: $13.7B (non-controlling interest)
Parent Equity: $4.8B
Ratio: NCI exceeds parent equity by 2.8x (unusual!)

Framework Analysis:


python scripts/generate_alerts.py --tickers IBKR --as-of 2024Q4

Finding:

✅ Reconciliation passes perfectly
✅ Partnership structure valid (broker-dealer model)
📊 Classification: structural, not unknown

Interpretation: Unusual but legitimate. Framework correctly identifies as structural rather than error.

How to Run on Your Clients

Step 1: Install Framework


# Option A: Poetry (recommended)
curl -sSL https://install.python-poetry.org | python3 -
poetry install

# Option B: pip
pip install -e .

Step 2: Hydrate Client Data


# Single client (by CIK)
python scripts/hydrate_companyfacts.py --ciks 0000320193

# Multiple clients (by ticker)
python scripts/hydrate_companyfacts.py --tickers AAPL,MSFT,GOOGL

# Your entire client list (from CSV)
python scripts/hydrate_companyfacts.py --csv-file clients.csv

Data source: SEC EDGAR companyfacts API (public, free, rate-limited to 10 req/sec)

Step 3: Run Validation


# Quarterly validation
python scripts/demo.py --ticker AAPL --frequency quarterly

# Annual validation
python scripts/demo.py --ticker AAPL --frequency annual

# Batch validation (all clients)
python scripts/run_empirical_validation_n500.py \
  --dataset data/cache/companyfacts/ \
  --output results/client_validation.json

Step 4: Review Results

Pass/Fail Output:


Filing: AAPL 2024-Q3
┌─────────────────────┬────────┬──────────────────────────┐
│ Test                │ Result │ Details                  │
├─────────────────────┼────────┼──────────────────────────┤
│ Leverage Identity   │ PASS   │ A/E - L/E = 1.0001       │
│ Equity Bridge       │ FAIL   │ Gap: $150M (likely OCI)  │
│ NCI Reconciliation  │ PASS   │ Δ NCI reconciles         │
│ Dividend Coverage   │ PASS   │ Dividends < FCF          │
└─────────────────────┴────────┴──────────────────────────┘

Action Items:
1. Request OCI rollforward from client (IFRS 9 FVOCI missing)
2. Verify FX translation reserve reconciliation (IAS 21)

Step 5: Document Findings

For Audit Workpapers:


# Generate PDF report
python scripts/make_board_pack.py --ticker AAPL --quarter 2024Q3

# Export to CSV for workpaper software
python scripts/export_results.py --format csv --output workpapers/

Report includes:

Pass/fail summary
Gap analysis with IFRS/GAAP citations
Comparison to prior quarters
Recommended follow-up procedures

Common Issues & Solutions

Issue 1: "XBRL tag not found"

Error:


KeyError: 'us-gaap:OtherComprehensiveIncomeForeignCurrencyTransactionAndTranslationAdjustmentNetOfTax'

Cause: Company uses non-standard XBRL tag or IFRS tag

Solution:


# Add to config/concept_aliases.yaml
OtherComprehensiveIncomeForeignCurrencyTransactionAndTranslationAdjustmentNetOfTax:
  - ifrs-full:ExchangeDifferencesOnTranslation
  - custom:FXTranslationReserve

Issue 2: "Equity bridge doesn't close"

Error:


⚠ Gap detected: $500M unaccounted (10% of average equity)

Diagnostic steps:

Check OCI components (most common source of gaps)
Verify NCI changes if applicable
Look for restated priors (should be in adjustments)
Check for share-based compensation (often missed)

Framework helper:


python scripts/diagnose_equity_gap.py --cik 0000320193 --period 2024Q3

Issue 3: "Sample dataset detected"

Error:


RuntimeError: Using sample dataset (2 rows). Set DATASET_PATH for real data.

Solution:


# Set environment variable to your companyfacts directory
export DATASET_PATH=/path/to/companyfacts/
python scripts/compute_metrics.py

Integration with Audit Workflow

Phase 1: Planning (Risk Assessment)

Use ML audit risk model:


python scripts/train.py --model audit-risk \
  --features equity_bridge,leverage,sector \
  --output models/audit_risk.pkl

python scripts/predict_risk.py --ticker AAPL
# Output: High risk probability: 0.87 (AUC 0.949 on validation set)

Interpretation: Prioritize clients with high predicted risk.

Phase 2: Fieldwork (Testing)

Run automated tests:


# All standard tests
pytest tests/validators/ --cik=0000320193

# Specific tests only
pytest tests/test_equity_bridge.py tests/test_leverage.py

Phase 3: Reporting (Quality Review)

Before signing off:


# Final validation
python scripts/final_checks.py --ticker AAPL --partner-review

# Generate summary for engagement quality review
python scripts/make_summary.py --output eqr/AAPL_validation_summary.pdf

Training & Support

Self-Paced Learning

Quickstart: README.md (30 minutes)
Deep dive: Mathematical exposition (2 hours)
Hands-on: Case studies notebook (1 hour)

Case Studies

See docs/cases/CASE_STUDIES.md:

Boeing: Negative equity analysis
IBKR: Unusual NCI structure
Lowe's: Buyback-driven equity decline
Domino's: Highly leveraged franchisor model

FAQ for Auditors

Q: Does this replace manual procedures?

A: No. It's a diagnostic tool that flags areas for manual follow-up.

Q: Is this approved by regulators?

A: Not officially. Framework provides mathematical foundation, but audit standards (ISA, PCAOB) still require professional judgment.

Q: Can I use this in client deliverables?

A: Yes, it's MIT licensed. Cite as: Chitnis 2025, Accounting Conservation Framework.

Q: What if client uses private company GAAP?

A: Framework designed for IFRS/US GAAP. Private company GAAP partially supported (equity bridge works, OCI components may differ).

Q: How do I get support?

A: Open issue on GitHub, or contact author at nirvanchitnis@gmail.com.

Pilot Program

We're seeking audit firms for pilot testing:

Commitment:

Test on 5-10 clients
Provide feedback (accuracy, usability, integration)
Optional: Co-author case study

Benefits:

Early access to new features
Customization for your firm's taxonomy
Training for your team
Recognition as early adopter

Contact: nirvanchitnis@gmail.com

Last Updated: 2025-01-05