AI in Accounting: Where the EU AI Act Applies

Accounting Has Quietly Become an AI-Intensive Profession

The accountancy profession has undergone a quiet transformation over the past five years. AI tools are now embedded across the workflow: automated transaction categorisation, intelligent document extraction, anomaly detection in audit, predictive tax modelling, and AI-assisted compliance reporting. For many East Midlands accounting practices, these tools have become essential to delivering services efficiently and competitively.

The EU AI Act now requires accountancy firms to examine these tools through a regulatory lens. Not every AI application in accounting will be classified as high-risk, but several common use cases fall squarely within the Act's scope. Understanding where the boundaries lie is the first step towards compliance.

Automated Auditing: Where AI Meets High-Risk Classification

AI-powered audit tools represent one of the most significant areas of regulatory exposure for accounting firms. Modern audit platforms use machine learning to analyse entire populations of transactions rather than relying on sampling, identify patterns and anomalies that human auditors might miss, assess going concern risk, and evaluate the reliability of client controls.

Under the EU AI Act, the critical question is whether these tools are making assessments that materially affect natural persons or legal entities. Where an AI audit tool's findings influence a public interest entity's financial statements, or where the audit opinion is materially shaped by AI analysis, the system is operating in territory that the Act is designed to regulate.

The classification becomes clearer when the AI tool is used in statutory audit work for entities with EU operations or EU investors. In these cases, the AI system's output reaches into the EU regulatory space, potentially bringing it within the Act's extraterritorial scope. The auditor's professional judgement remains paramount, but if the AI is doing the substantive analytical work and the auditor is primarily reviewing the AI's conclusions, the system's classification shifts towards high-risk.

Tax Classification AI: The Compliance Crossover

AI systems used for tax classification and tax treatment determination present a particularly interesting regulatory challenge. These tools analyse transactions, income streams, and business structures to determine the correct tax treatment, often across multiple jurisdictions.

For UK accountancy firms serving clients with EU-connected tax obligations, AI-driven tax classification can directly affect how much tax a natural person or entity pays in an EU member state. This creates a direct nexus between the AI system's output and its impact on persons within the EU.

The EU AI Act does not explicitly list tax classification as a high-risk category in Annex III. However, the Act's framework allows for AI systems to be classified as high-risk based on their impact and the sector in which they operate. Tax determinations that affect individuals' financial obligations are precisely the type of consequential automated decision-making the Act aims to regulate.

Accountancy Europe, the representative body for the European accountancy profession, has acknowledged this uncertainty in its position papers on AI regulation. Their guidance emphasises that accountancy firms should adopt a risk-based approach to AI classification, erring on the side of caution where the AI system's output has material financial consequences for individuals.

Making Tax Digital and AI Compliance

HMRC's Making Tax Digital (MTD) programme has accelerated the adoption of AI in UK accounting practices. MTD-compliant software increasingly uses AI for automatic transaction categorisation, VAT classification, error detection, and digital record-keeping. While MTD is a UK programme, the AI systems that support it can still fall within the EU AI Act's scope.

Consider a common scenario: an East Midlands accounting firm uses AI-enabled MTD software to manage VAT returns for a client that trades with EU customers. The AI system automatically classifies transactions, determines VAT treatment for cross-border supplies, and identifies potential errors. If those VAT determinations affect the tax position of EU-based counterparties, or if the client has EU establishment through which the AI-processed data flows, the system may be within the Act's scope.

The practical risk here is not that MTD software is inherently high-risk, but that the AI features embedded within it may be performing functions that cross the regulatory threshold when applied to EU-connected work. Firms need to understand the AI capabilities of their MTD software, not just its HMRC compliance features.

Accountancy Europe Guidance

Accountancy Europe has been proactive in helping the profession navigate the EU AI Act. Their key recommendations for accounting firms include several important principles.

Proportionality. The compliance effort should be proportionate to the risk posed by the AI system. A small practice using basic AI-powered bookkeeping software faces different obligations than a firm deploying advanced AI audit analytics on public interest entities.

Professional scepticism applies to AI. Just as auditors must exercise professional scepticism towards client representations, they must also exercise scepticism towards AI-generated outputs. Accepting AI analysis uncritically is both a professional risk and a regulatory risk under the EU AI Act.

Vendor due diligence is essential. Accounting firms cannot comply with the EU AI Act by simply trusting that their software vendors have done so. Firms must actively assess whether their vendors' AI systems meet the Act's requirements and must be prepared to switch providers if they do not.

Documentation is a professional obligation. The audit trail requirements of the EU AI Act align with the accounting profession's existing documentation standards. Firms should extend their existing working paper practices to cover AI system usage, including recording which AI tools were used, what outputs they produced, and how those outputs were reviewed and acted upon.

Conducting a Risk Assessment for Your Practice

Every accounting firm using AI tools should conduct a structured risk assessment. Here is a practical framework.

Inventory your AI tools. List every piece of software in your practice that uses AI or machine learning. Include practice management tools, audit software, tax preparation platforms, document management systems, and client-facing portals. Many firms underestimate how many AI-enabled tools they use because the AI features are not prominently marketed.

Map each tool's function to the Act's categories. For each AI tool, document precisely what it does and cross-reference this against the EU AI Act's Annex III categories and the general high-risk criteria. Our AI compliance audit service provides a structured methodology for this exercise.

Identify your EU touchpoints. For each AI tool, determine whether its outputs affect persons or entities in the EU. This includes EU-resident clients, UK clients with EU operations, cross-border tax matters, and audit work on entities with EU investors or subsidiaries.

Assess the level of human oversight. For each high-risk AI tool, evaluate whether the current level of human oversight meets the Act's requirements. This means qualified professionals who understand both the accounting issues and the AI tool's limitations must meaningfully review AI outputs before they inform client-facing work.

Evaluate your vendors. Contact each AI tool provider and request their compliance position regarding the EU AI Act. Document their responses. Where providers cannot demonstrate compliance readiness, develop contingency plans.

Build your compliance documentation. Using the information gathered above, create a compliance file for each high-risk AI system. This should include the risk assessment, vendor documentation, human oversight procedures, usage logs, and incident records.

Acting Before August 2026

The August 2026 deadline for high-risk AI compliance is now less than seven months away. Accounting firms that start their risk assessment now have time to address issues methodically. Firms that wait until summer will find themselves making rushed decisions about tools that are deeply embedded in their workflows.

Twisthand Intelligence specialises in helping East Midlands professional services firms, including accounting practices, navigate AI compliance. Our compliant implementation service helps firms deploy AI tools that meet both professional standards and EU AI Act requirements from day one. For firms that already have AI tools in place, our compliance audit identifies gaps and provides a clear remediation plan. Our accounting sector page details our specific approach for the profession.

For ongoing peace of mind as the regulatory landscape evolves, our compliance retainer service provides continuous monitoring and guidance, ensuring your firm stays ahead of regulatory changes rather than reacting to them.