Digital Financial Reporting

The move to digital financial reporting will cause a number of very significant shifts.  One of these shifts relates to how metadata can be employed.  This shift is both an opportunity and a threat.  Most accountants and CPAs don't have a good enough grasp as to what metadata is or the role it plays.  Therefore, nor do they understand the side of the shift equation on which they will end up.

This is what I mean.

Let me use the external financial statement as an example.  Most external financial statements today are created using Microsoft Word.  I hear the number 85%.  I am not talking about the balance sheet, income statement, and maybe cash flow statement which might be generated from an accounting or ERP system.  I am talking about a complete financial statement.

So, how much does Microsoft Word know about financial statements?  You are probably thinking that this is a rather odd question, of course Word knows nothing about financial statements.  The person creating the financial statement is the one which knows about financial statements; they use their knowledge of financial reporting and US GAAP or IFRS to create a financial statement using Word.

That is exactly the problem.  In fact, it is two problems.  The first problem is that Word cannot help you create that financial statement and get it correct.  The second problem is that once the information is put into Word, because Word does not have any knowledge of the financial information within the financial statement; reusing that information involves humans, usually with domain knowledge, rekeying that information in order to make the information actionable.

The graphic below shows this has worked in the past (and likely how most people do this today):

But what if Word did understand financial statements?  Well, word my never understand external financial statements, but other applications will.  You could get Word to understand financial statements by using its macro language, which is VBA and actually quite powerful, but more likely other applications will be created.  And how might a software application understand a financial statement you might ask? Structured information and metadata. (To understand that statement is a journey, start here on that journey. This has the complete story. Once you see this in action, you will get it, get it.)

Basically information which you and other know about a domain such as financial reporting will be expressed in a form which a computer can understand.  That is what the XBRL medium does, it expresses information in a structured form so a computer can understand it.  Additional information, metadata, will be expressed which is helpful in working with that structured information.

Algorithms, or computer programs, will do stuff with that structured information and metadata.  Lots of stuff.  The graphic below shows this:

So two things will happen.  First, who can create information and how they create that information will change dramatically. Because the computer can help the user, a less skilled person can do the work because the "human knowledge" is now expressed in the metadata.  Second, automated reusing the information will become possible.

This will spiral, the possibilities widening and widening as more and more metadata and algorithms are created and employed.

What is the threat?  If your skill is memorizing and regurgitating information, this is a threat.  If your skill is rekeying information, this is a threat.  Basically, think of what numerically controlled (NC) machines did to the manufacturing process.  Robots build a lot of stuff today using algorithms and metadata which control the machines which churn out consistent, higher quality output than humans can generally create.

The opportunity? Creating algorithms, creating metadata, doing value-add analysis of all that structured, model-based information.

And these opportunities and threats are not limited to external financial reporting, or even financial reporting.  These same ideas can be applied to many, many other domains.

Stay tuned to my blog, it may help you understand and take advantages of the opportunities and not end up as road kill.