Note that it's not as controversial as it first seems; it was entered in the digital art category at a small-town art show, and there were only a handful of submissions!
However, in an interesting unintentional juxtaposition, I noticed there's a picture of this AI painting that also shows the painting above it, and it's a painting generated by acrylic pouring. This is hilarious to me, because acrylic pouring is a technique that outsources the detailed composition of your painting to a fluid flow simulation running in the real world!
Where's the controversy?
Why isn't acrylic pouring being banned from art shows?
In both acrylic pouring and AI-generated image composition, the creator spends a lot of time learning about and experimenting with an arcane set of techniques that ultimately impact the final image, but in very indirect and often unpredictable ways. And as in photography, much of the act of creating the art is in the curation; someone doing acrylic pouring or AI image generation spends time creating tens or hundreds of images to get the final result just right.
I've done both acrylic pouring and AI-generated art, and both require learning a lot of techniques to do well. All that being said, any painting or drawing that involves fine hand-applied brushstrokes represents a level of skill at composition and detail that is not represented in these other art forms.
I think the best solution to this is to break art into different categories at art shows, specifically:
Fine craftsmanship -- this is anything where the artist individually applied a large fraction of the brushstrokes or pen-strokes with their own hand. It represents masterfulness at fine composition as well as the physical craft of making the painting.
Synthetic art -- this is anything where any sort of algorithmic process, holistic synthetic physical process, or readymade content is applied to the creation of the art. This could be anything from collage to photography to photoshop to AI-generated content. It might be tempting to have a separate category for digital art created from "scratch" in a program like Photoshop vs AI-generated art, but the reality is that the line between the two is already getting blurred and will be completely blurred over the next couple of years.
And I'd assume that the judges would at least understand that the winning image was digital art given the difference in texture between paint on canvas and a printed image. To me the flaws in the AI image are fairly obvious (eg the yellow-gray circle is not round, and the not-roundedness of it has breaks at the positions of the two women, just like the uneven landscape of the Mona Lisa) and would have counted against it whether the judges thought it was made by a human or not.