Digital Financial Reporting

The transition/changes XBRL is enabling is explained by the book The Innovator's Dilemma, by Clayton Christensen, I believe. Entrenched established companies and attacking entrant companies would both gain from reading this book.

Why? The Wall Street Journal reports that Kodak is filing for bankruptcy.  Borders has filed for bankruptcy. Newspapersare dying off. iTunes and the iPod have changed the music industry.

This same type of disruption is occurring in the domain of financial reporting. If you are involved in financial reporting in any way you may believe you are exempt and that the changes will not impact you. But read the book, it just might change your view.

The global consultancy firm Gartner classifies XBRL as a transformational technology.  Gartner defines transformational as something that "enables new ways of doing business across industries that will result in major shifts in industry dynamics."

The Innovators Dilemma classified technologies into two buckets:

• Sustaining technologies which foster improved product performance
• Disruptive technologies which result in worse product performance in the short term, but then over the long term they bring to a market a very different value proposition than had been available previously

What Gartner says about "enables new ways of doing business" and what Chritensen calls "a very different value proposition" seem to be the same characteristic to me.

No one really knows exactly how all this change will pan out, who the winners will be, who the losers will be, what innovations entrants into the market will come up with, or the other dynamics which will push on the domain of financial reporting. You could make some good guesses.  Financial printers seem to be in a rather precarious position, that is rather clear. How accountants will be affected is less clear. Accounting software vendors, also harder to say.  Financial reporting workflow and processes in general, there are many clues emerging from the US SEC's bold experiment with XBRL.

Don't be fooled into believing that digital financial reporting will not take off in other areas of financial reporting, beyond public company reporting to the US SEC. There are many, many other existing innitiatives by regulators around the globe.  I have heard a figure from XBRL International that 70% of the capital markets report using XBRL.  I have also heard that there is work going on toward creating a not for profit reporting taxonomy and a state and local government reporting taxonomy in the US.

Who would have ever predicted that Kodak would have to file for bankruptcy? The evidence seems to be very strong that digital financial reporting may just become a reality.

How do you think things might change for financial reporting?