AI's New Job: Reading Contracts to Predict a Company's Money Future
Figuring out how much money a company actually makes, or its "revenue," is a really big deal. Everyone from the company's bosses and employees to government watchdogs and people investing their money pays close attention to it. How a company counts its revenue is largely based on the agreements it signs with customers or suppliers – these are called supply contracts. These contracts contain all the important details that decide how much money a company should report. With newer accounting rules, like something called ASC 606, these contracts have become even more central to the process of recognizing revenue.
But here's the tricky part: understanding exactly how all the words and clauses in these contracts turn into reported revenue has always been tough. Why? Because supply contracts are often very long, full of dense legal jargon, and complex. The information isn't neatly organized; it's often just plain text, unstructured, and heavily depends on the specific situation and context of the agreement. Getting it right usually needs people who understand both business and law, plus detailed knowledge about the specific company and what it sells. Because of these difficulties, it's been hard for researchers to clearly show how the specific things within contracts relate directly to the revenue numbers a company reports.
This is Where Artificial Intelligence Steps In
Think of AI, especially the newer versions like Generative AI (GAI) tools such as ChatGPT, as super-smart readers that can handle mountains of text. These tools are particularly good for looking at documents like supply contracts because they can:
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Handle huge amounts of complicated text.
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Figure out the detailed connections and patterns hidden inside documents.
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Remember and use the surrounding information (the context) even in very long agreements.
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Access a vast amount of knowledge, including business laws, accounting rules, and how different industries work – which is vital for understanding contracts correctly.
Word on the street is that even major accounting firms are starting to use GAI to help them analyze supply contracts when they audit companies.
A recent study put GAI, specifically a powerful version called ChatGPT-4o, to the test. They used it to look at thousands of important supply contracts that public companies had filed with the government (the SEC) over more than 20 years. These contracts were chosen because rules say they should have a significant impact on the company's revenue. The main goal was to use AI to pull out valuable information from these contracts and connect it to the company's reported revenue numbers.
How AI Unpacks the Contract Puzzle
To deal with how complicated and varied supply contracts are, the researchers developed a smart approach using GAI:
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Creating a Standard Map: First, the AI looked at the table of contents sections in many contracts to find a common layout. This helped identify 17 different types of contract sections, like "What's Being Sold," "How and When to Pay," or "What Happens if Someone Breaks the Agreement." This standardized map helps organize all the different kinds of information found across many contracts.
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Deep Dive with Step-by-Step Thinking: Then, the AI was given the entire text of each contract, along with the standard map of sections. Using a technique that mimics human reasoning, the AI was guided step-by-step through the analysis. This process involved:
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Pinpointing basic facts, like the total value of the contract and how long it lasts.
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Estimating the expected revenue from the contract, including a best guess and a possible range, often relative to the contract's total value.
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Identifying which of the 17 standard sections were present in the contract.
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For each relevant section, the AI assessed its purpose, whether it likely increases, decreases, or has no effect on the expected revenue estimate, and how much it contr