BLOG:  Digital Financial Reporting

This is a blog for information relating to digital financial reporting.  It is for innovators and early adopters who are ushering in a new era of digital financial reporting.

Much of the information contained in this blog is summarized, condensed, better organized and articulated in my book XBRL for Dummies and in the three documents on this digital financial reporting page.

Financial Transparency Act of 2017

Remember The Data Act?  Well, Rep. Darrell Issa (Republican from California) is giving it a shot again.  He has introduced the Financial Transparency Act of 2017.

To amend securities, commodities, and banking laws to make the information reported to financial regulatory agencies electronically searchable, to enable RegTech applications, and for other purposes.

We shall see...

Posted on Saturday, March 25, 2017 at 07:18AM by Registered CommenterCharlie in | CommentsPost a Comment | EmailEmail | PrintPrint

Accountants Make Top 5 List of Jobs Replaced by Robots

In his article, The 5 Jobs Robots Will Take First, Shelly Palmer lists the top 5 jobs that will be replaced by robots or computer algorithms.  Here is his list:

  1. Middle management
  2. Commodity salespeople
  3. Report writers, journalists, authors, and announcers
  4. Accountants and bookkeepers
  5. Doctors

What does this mean for you?  It is worth watching this video interview to get important details.  An Oxford University study concludes that 47% of jobs in the United States are at risk of being automated using computers over the next 20 years.

Palmer says, "If your job is taking a number from one box in Excel and put it in another box in Excel and writing a narrative about how it got there, thinking that report is a big deal; machines are coming for you and coming fast."

Here is what Palmer says about accountants and bookkeepers:

4 – Accountants & Bookkeepers

Data processing probably created more jobs than it eliminated, but machine learning–based accountants and bookkeepers will be so much better than their human counterparts, you’re going to want to use the machines. Robo-accounting is in its infancy, but it’s awesome at dealing with accounts payable and receivable, inventory control, auditing and several other accounting functions that humans used to be needed to do. Big Four auditing is in for a big shake-up, very soon.

Technology is neither good or bad, it is simply a fact of life.  Just like machines replaced manual labor during the first industrial revolution, software will replace manual and cognitive work in the fourth industrial revolution.  You need not worry, you need to adapt.  

How do you adapt?  The best way to adapt is to forge man-machine partnerships; learn how to leverage machines.  Learn how machines work.  You need to wrap your head around "digital".  The first step in adapting is understanding the process that is about to occur.  In another article, The 5 Jobs Robots Will Take Last, Palmer points out that almost every human job requires us to perform some combination of the following four basic types of tasks:

  • Manual repetitive (predictable)
  • Manual nonrepetitive (not predictable)
  • Cognitive repetitive (predictable)
  • Cognitive nonrepetitive (not predictable)

Manual is using one's hands or physical action to perform work. Cognitive is using one's brain or mental action or a mental process of acquiring knowledge/understanding through thought, experience, use of the senses, or intuition to perform work. 

Predictable manual or cognitive tasks can be automated.  Unpredictable manual or cognitive tasks cannot be automated.  He gives the example of an assembly line worker that performs mostly manual repetitive tasks which, depending on complexity and a cost/benefit analysis, can be automated. On the other hand, a CEO of a major multinational conglomerate performs mostly cognitive nonrepetitive tasks which are much harder to automate.

If your skills include only the ability to perform manual or cognitive repetitive tasks, you need to get new skills.  Those most at risk are college students.  College students are paying very high prices for education in accounting that, if students are not careful, could be obsolete very soon.  Don't make that mistake.

I wrote a paper, Introduction to Knowledge Engineering for Professional Accountants, which goes into more detail.  In fact, it would be helpful for most accountants to read all of Part 1 of Intelligent XBRL-based Digital Financial Reporting. This will help you understand how to identify what may or may not be automated.

Information barbarians will not fare well in the information age. Adapt.  Further, accounting education needs to change.

Posted on Tuesday, March 7, 2017 at 07:30AM by Registered CommenterCharlie in | CommentsPost a Comment | EmailEmail | PrintPrint

Properly Differentiating Data, Information, and Knowledge

The terms data, information, and knowledgeare easily confused.  You can understand how to properly differentiate these terms by watching this 4 minute video by Nick Milton.

Knowledge is the piece of information that you need right now that allows you to take effective action. Actionable information.

Knowledge based systems provide capability and know how.  Knowledge management is about creating a managed system that routinely and systematically institutionalizes knowledge and ensures that people have the knowledge they need to make correct decisions, take effective action, take the correct action.

The result of poor knowledge management are:

  • Mistakes repeated
  • Successful practices not replicated
  • Slow rate of learning
  • Knowledge lost when staff retires or gets a new job

We live in the information age, not the "data age".  How do you turn data into information? How do you store information?  How many mistakes does your organization repeat over and over?  How are your processes for capturing good ideas and repeating them? How fast does your organization learn?  How much knowledge will be lost when staff leave your organization?

Posted on Tuesday, February 28, 2017 at 01:52PM by Registered CommenterCharlie in | CommentsPost a Comment | EmailEmail | PrintPrint

Understanding XBRL's Role in the Fourth Industrial Revolution

We are in the midst of the fourth industrial revolutionAre you ready?  Do you even know what Industry 4.0 is or what it means for you?

Here is a list of the four industrial revolutions:

  1. Mechanization, water power, steam power.
  2. Mass production, assembly line, electricity.
  3. Computer and automation.
  4. Cyber physical systems.

In their paper Imagineering Audit 4.0, Jun Dai and Miklos Vasarhelyi of Rutgers University provide a comprehensive and complete description of how industry will work in the future and therefore why a knowledge media such as XBRL is a critical required part of the information infrastructure for turning their vision into a reality.

Dai and Vasarhelyi describe Industry 4.0 as follows:

Originating in Europe and spreading to the US, Industry 4.0 emphasizes six major principles in its design and implementation: interoperability, virtualization, decentralization, real-time capability, service orientation, and modularity.  The objective of Industry 4.0 is to increase the flexibility of existing value chains by maximizing the transparency of inbound and outbound logistics, manufacturing, marketing, and all other business functions such as accounting, legislation, human resource, etc.

Basically, what Industry 4.0 means is that technologies will be used to dramatically improve the efficiency and effectiveness of businesses and other organizations.  What does this mean?  Some say that it means 47% of jobs in the United States are at risk from automation.

No one knows exactly what this fourth industrial revolution will mean, but based on the other three I think the fourth will turn out just fine if you make sure your skill set is up-to-date.  Information barbarians will likely not fare well.  It is far better to understand digital.

But let's get back to XBRL's role in Industry 4.0.  On page 16 of the paper, in the section titles "Standardization of information and data", Dai and Vasarhelyi point out the important role standards play in this new world:

To facilitate information exchange and analysis in Audit 4.0, regulators and standardization agencies should create suitable standards that define the formats and naming rules of commonly used data.

On page 14, the role of pre-determined business rules is pointed out:

In addition, business processes will be monitored against pre-determined rules to detect violations of key controls, and cross-verified via certain continuity equations.

As I have said before, business rules prevent anarchy.  For increased efficiency and effectiveness in business processes to be realized, business information exchange will need to work correctly.  For meaningful machine-based information exchange to work, you need pre-determined rules relating to technical syntax, domain semantics, and workflow.  It really is that straight forward.  This set of principles helps you understand the details.

Further, while it might not seem to be the case because of quality issues; XBRL-based reporting by public companies to the SEC helps accountants and others figure out how to use these sorts of technologies.  It is actually rather amazing that about 7,000 different companies can represent rather complex financial information and communicate that information to the SEC and get 98.96% of that information right.  On average, 84.7% of companies get all of the measured information right, and a set of 8 software vendors manage to get 97% of more of their reports correct as measured by the checks that I perform.

But 98.96% is not good enough.  What is good enough?  Six sigma is one target manufacturing has used, that is 99.99966% of everything being correct.  Is that good enough for information-based processes?  Well, it is a good minimum target to shoot for currently.

Conceived of in 1998 and turned into a global standard by the American Institute of Certified Public Accountants (AICPA) in 1999; XBRL is being perfected as a critical knowlege media ready for Industry 4.0.

If you are an accountant or other business professional and you want to understand digital better, I would suggest Part 1 - Foundation for Understanding: Background, Framework, Theory, Principles.

Posted on Sunday, February 26, 2017 at 08:29AM by Registered CommenterCharlie in | CommentsPost a Comment | EmailEmail | PrintPrint

Changing Old School Financial Report Creation Processes

No one really disputes the fact that old school processes, practices, and procedures for creating external financial reports contain inefficiencies.  For example, consider these four sources:

  • CFA Institute: calls for "...greater efficiencies within the current inefficient system" [of creating financial reports].
  • Gartner: "...average Fortune 1000 company used more than 800 spreadsheets to prepare its financial statements"
  • Ventana Research: "...for larger companies, assembling the periodic external reports typically is an inefficient and error-prone process."
  • PriceWaterhouseCoopers: "...old school manual processes..." and "commonly cut and pasted, rekeyed, or manually transferred into word processing and spreadsheet applications used for report assembly and review process steps"

Have the stars aligned, creating an opportunity for reinventing these processes?  I think so.

What has changed? 

The answer is that one thing has changed which has enabled another thing.  If you read the first PDF I referenced above, you will notice that each of those four organizations hails XBRL or "structured data" as the way to to make financial reporting processes more efficient.

That is not quite right.  XBRL or structure data is not the change that will make processes more efficient; structured data enables the change to occur.  This video, How XBRL Works (which now has over 46,000 views), helps you see what structured information is as contrast to unstructured information.

So, XBRL or structured data is the enabler of a change, it is not the change itself.

Again I ask, then what changed?  Well, two things changed.

First, the structured information lets a computer effectively address the individual pieces of a financial report.  Because of the structure, software applications can do things with the individual pieces of the report.  Basically, you can take measurements of structured information; that was impossible when financial reports were unstructured information.

Second, because you can address or measure or otherwise work with the individual pieces that make up a financial report; more processes, procedures, and other tasks used in the report creation process can be automated.

Old school review processes are almost 100% manual.  It does not have to be this way.  On the other hand, there is ZERO probability that 100% of the financial report creation process will be automated.  That is absurd.

What percentage CAN effectively be automated though?  Some percentage.  That percentage is greater than 1%.  Is it 10%?  Is it 20%?  Is it 50%?  More than that?

Further, there will no doubt be quality improvements also.  There is NO WAY that a process that is nearly 100% manual can be of perfect quality.  So, there is some level of quality problems that exist in the current old school processes.  But, you cannot see those problems or measure the problems because, you guessed it, the current financial reports are unstructured and you cannot address the pieces of a report.

Just because you cannot measure quality problems does not mean that quality problems do not exist.  They exist.

How exactly will financial report creation processes be made more efficient?  The answer to that question is machine-readable business rules.  Remember, business rules prevent anarchy.

More on that later...so stay tuned!

But have the stars aligned enough to allow for a real change to the old school manual processes of creating an external financial report to truly be replaced?  That depends entirely on whether how clever software creators are in making all the pieces of knowledge based systems usable by business professionals.

It really is that simple.  The law of conservation of complexity states very clearly, you leave one required piece out, your system will simply not work.

There is zero probability that professional accountants will want to go to the IT department as part of getting the external financial reports out.  That will NEVER happen.  They would rather struggle with the currently manual processes than lose any control over the process. Proof of that: current processes.

Some software creators have provided small incremental improvements to processes.  If knowledge based systems can effectively be utilized in financial report creation processes, that will be a disruptive innovation, not just another incremental improvement.

Posted on Tuesday, February 14, 2017 at 08:25AM by Registered CommenterCharlie in | CommentsPost a Comment | EmailEmail | PrintPrint
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