Digital Financial Reporting

The American Institute of Certified Public Accountants (AICPA) released an exposure draft, Audit Data Standards, which I believe is very much on target. The topic of audit data standards is not really that "sexy", even less sexy than XBRL in general which tends to make most people's eyes glaze over. But these audit data standards are important at a number of levels.

Two people, Eric Cohen and Gianluca Garbellotto both of whom are named contributors to this exposure draft, have been focused on this topic for years. Their work with XBRL Global Ledger will help users of this standard realize even more benefit from digital financial reporting.

Here is why I see these audit data standards important:  They are part of the "glue" which ties a financial report to the business systems which contain the information.  Let me explain.

Years ago I was an auditor with the international firm which was called Price Waterhouse at the time (now PricewaterhouseCoopers).  As an auditor, I got to see how companies closed their books and generated their financial statements.  All the companies were doing the same thing, but each did things in slightly different ways.

When I left public accounting for my new role as the person responsible for generating financial reports, I remembered all that I had seen and synthesized what I learned into my approach to getting the financial statements out.

I did not have a name for it back then, but I eventually ended up calling what I had created a "closing book".  My closing book was a set of Microsoft Excel spreadsheets, Microsoft Access databases, and queries which tied the spreadsheets, databases, accounting system, and other odds and ends together.

The system only worked within the local network I was connected to (there was no Internet at that time), it was brittle and would not scale because I am not a very good programmer, and there were other shortfalls within the system I had created; but it was better than doing all this manually and it worked.

A fundamental piece of this system was the Excel spreadsheets.  These spreadsheets organized all the information which ended up in the financial statements as I learned how to do it as an auditor.  Basically, these schedules were high-quality, well organized audit schedules which I learned to create as an auditor with Price Waterhouse.

Here is an example of the schedule which I had to support all the information related to long-term debt (click on it to see a larger screen shot):

Long-term debt related supporting information (i.e. audit schedules)

If you look at this you will notice that it has a list of debt instruments, information about each debt instrument, information about the maturities of each debt instrument, the interest accrual, and so forth.  (Remember, this is a prototype, there is more information.)

What if:

• Rather than organizing this information using a proprietary tool such as Microsoft Excel, the information was organized within a global standards such as XBRL?
• Rather then linking the information together using the cells of a spreadsheet, the information was linked semantically using the concepts of XBRL Global Ledger, the US GAAP Taxonomy (or the IFRS taxonomy), etc.
• Rather than expressing the business rules as Excel formulas, the business rules where expressed using XBRL Formula so that the business rules could be shared along with the information
• When the information was changed, that change would flow through the entire "web" of linked information, updating all the information for that change
• The links were both to internal information which exists within your organization, but also to external (with the appropriate security) information which supports the information contained in or which supports the financial report.

Said another way, what if the entire process of creating a financial report was not woven together using inconsistent information formats and droves of overworked, expensive, highly-skilled accountants re-keying and re-footing and otherwise "ticking" and "tying" everything together; but rather more standard information formats where used, what supported the information for the accountant creating the information, the internal auditor reviewing what was created, the external auditor providing independent third-party review of that information, and other views where just different views of the same information?

When people talk about paving the "last mile" of finance, it is things like the audit data standards envisioned by the AICPA which will contribute to making this vision a reality.  These audit data standards are directly related to digital financial reporting, the end product or external financial report.  The audit data standards will let you do things like navigate from the financial report all the way back to the source information in whatever system that information came from.  You can see every business rule used in the journey that information took.

More specifically, I see these audit data schedules as a set of semantic spreadsheets which are all hooked together using additional semantics such as business rules which enables information to reliably flow throughout that entire system, whether a piece of that system is internal or external (i.e. say a regulator) to your organization.  Basically an "information supply chain".

This is not some "Star Trek" type fantasy, this is the power of standards.  Think of what life would be like without the universal product code (UPC).