Digital Financial Reporting

An ontology seems to be a means to an end. Probably the most important notion to understand about digital financial reporting is that of secondary use ontologies.  Secondary use ontologies are a currency of the information age. Understanding this currency is a key to thriving in the information age.

I don't have all of these pieces synthesized in my mind yet, like many of my blog posts this is more of a stream of consciousness dump on the journey toward understanding.

Something that I though was true may not be true at all.  Or rather, it may only be partially true. The premise of "the semantic web" which was held by some is "anyone can say anything about anything."  I thought that that statement was hogwash.  Why?  Well, think about the accounting equation: Assets = Liabilities and Equity. Who would dispute that fundamental building block of accounting?

Well, perhaps no one would dispute that specific fact.  However, there are many other facts which exist which might be disputed by others.  Said another way, there are likely some facts that few if anyone disputes and there are likely some facts that people do rightly dispute.

So what is the point?  The point is this, maybe there is not just one financial report ontology.  Maybe there are many.  Perhaps there is some base ontology that everyone agrees on such as "Assets = Liabilities and Equity" and other fundamental accounting concepts and relations. Everyone agrees at this level. It is kind of like how two attorneys who are arguing a case establish the facts of a case, the things that neither side disputes. This allows them to focus on the things where they don't agree to be the focus of the case they are arguing.

This is actually not my notion; there are actually names for these different camps.  Remember that an ontology is a description of the "things" and the "relations between things" which exist within a some determined field of study or "domain".

So, an ontology is a representation of something that exists in reality. An ontology is a "window on reality". There are two views of "reality" which are common in philosophy:

• Ontological materialism: The belief that reality exists regardless of human observers. (i.e. there is only ONE reality)
• Ontological idealism: The belief that reality is constructed in the mind of the observer. (i.e. reality is determined by the observer)

Does this mean that everyone can create their own reality? No.  That is where epistemology comes in. Epistemology is the theory of knowledge.

So, what is knowledge? Some say that knowledge is "justified true belief".  Basically, it seems that you need to have solid grounds for holding a belief and that you must be aware of such grounds.  You can't just make stuff up.  You must be able to justify your claims or beliefs.

How do you justify beliefs or claims? Evidence. Evidence must be of good quality and evidence should be logical and reasonable.  Hard to argue with that.  But how do you gather this evidence?  Well, again from philosophy, there seems to be two approaches to that:

• Empiricism: Evidence of true knowledge is primarily found on input from our senses; by experience and by observations.
• Rationalism: Evidence of true knowledge is primarily found based on reasoning; by research results which are verified by reasoning.

How does knowledge differ from opinion or belief? 

Epistemology has other aspects which explain how knowledge is obtained such as "propositional knowledge" which is the knowledge of facts and "practical knowledge" which is know how.

Why is knowledge important? Here is a great quote by Nicholas Rescher, a philosopher:

...Knowledge brings great benefits. The release of ignorance is foremost among them. We have evolved within nature into the ecological niche of an intelligent being. In consequence, the need for understanding, for "knowing one's way about," is one of the most fundamental demands of the human condition.

"Knowing one's way about." Before digital financial reporting, the only way one had to "know one's way about" was the information one had in their head.  What one person had in their head may have been different than what another person had in their head.

The rigor and discipline of trying to articulate in the form of an ontology what is in your head yields two things as I see it.  First, it yields clarity. Articulating this information in a form that both parties can better observe yields clarity.  Second, it yields something that a computer can understand. Digitizing financial reports is a lot of work, but it makes it so computers can interact with those digital financial reports.

At some level, there needs to be agreement on "reality".  For example, the fundamental accounting concepts and relations between those concepts of a financial report is such a level. At other levels, secondary use ontologies which build upon the fundamental level, there may be different views of "reality".  Distinguishing between these two levels seems critical.  It is highly likely that more variability will exist in secondary use ontologies.  However, those creating those secondary use ontologies cannot just make things up.  They must justify their beliefs and claims with quality evidence, logic, and reasoning.

I put together a play list of a handful of short videos which digs a little deeper into semantics, ontology, and epistemology.  These are terms business people are not that comfortable enough with.  Given that digital financial reporting is inevitable, perhaps business people need to get more comfortable.

Business people need to understand the currency of the information age. Computer readable knowledge is part of that currency.