XBRL-based structured digital financial reporting - Blog: Digital Financial Reporting (using XBRL)

Verification that a financial report is "valid" is not a mystery. Accountants have been doing this for years. However something very significant has changed. In the past, this verification process was a 100% manual process. Green eye shades, 10 key calculators, and deep accounting knowledge required by all who undertook this process. And because the process was so manual and because humans make mistakes, no matter how hard one tried things always slip through the cracks.

But now because financial reports can be read by a computer software application because of the structured nature of the financial report, such as a digital financial report expressed using XBRL, many things change. Many parts of the verification process can be automated such as checking mathematical computations and "if...then" type checks, "IF you have this financial statement line item, THEN you must provide this policy and this disclosure."

Another thing has changed. All those financial reports which were here-to-for verified using only human processes can now have automated processes applied to them very effeciently and effectively. All sorts of automated processes such as what is being called the SEC "RoboCop" or accounting quality model. Likely many interesting things will be discovered which have been missed before by humans.

While there are many interesting and sophisticated processes which will likely be thrown against financial reports in the coming years because they have become digital, below are the basics of creating a quality digital financial report such as an SEC XBRL financial filing.

Thinking through the process of verification

Let us start with fundamentals. Verification is the process of research, examination, and other tasks and steps required to prove or establish validity; evidence that establishes or confirms the accuracy or truth of something. Verification is a formal assertion of validity.

Validity can be defined as being well grounded; producing the desired result; free from logical flaw; based on sound reasoning; cogent; faithful.

Validity when it comes to a financial report is, arguably, that such a financial report is a true and fair or a faithful representation of a reporting entities financial and nonfinancial information articulated by such a financial report. Looking at this backwards - an untrue or an unfair report - is certainly not desirable. (Don't confuse true and fair as used here with the term "presented fairly" as used by auditors, we are discussing something different here.)

A financial report can be said to be valid if it possesses certain traits which can be defined in general terms and for clarity are listed below to bring them into the reader's mind. (These terms are highlighted in the AICPA Statement of Position 09-1 Performing Agreed-Upon Procedures Engagements That Address the Completeness, Accuracy, or Consistency of XBRL-Tagged Data, http://bit.ly/XIoqxv ):

Completeness: Having all necessary or normal parts, components, elements, or steps; entire.
Correctness: Free from error; in accordance with fact or truth; right, proper, accurate, just, true, exact, precise.
Consistency: Compatible or in agreement with itself or with some group; coherent, uniform, steady. Holding true in a group, compatible, not contradictory.
Accuracy: Correctness in all details; conformity or correspondence to fact or given quality, condition; precise, exact; deviating only slightly or within acceptable limits from a standard.

Assurance on XBRL instance document: A conceptual framework of assertions (see http://bit.ly/VjHwdG) points out the need for a framework for verifying the appropriateness of a digital financial report.
While these four notions which relate to the "trueness" and "fairness" must exist for every fact reported by a financial report, they also need to exist when considering the financial report in its entirety and the relations between reported facts. Further, it would seem to be appropriate to add the term "sensible" and perhaps even "logical" to this list. Clearly digital financial reports should be both sensible and logical.

Two other notions help bring the notion of trueness and fairness of information at the fact and at the report level into focus, looking at the financial report holistically:

Fidelity: Fidelity relates to the loyal adherence to fact or detail; exactness, faithfulness. The representation of the facts, events, transactions, and other circumstances represented within a financial report properly reflect, without distortion, reality. High fidelity is when the reproduction (the financial report) with little distortion, provides a result very similar to the original (the reality of the reporting entity and environment in which the reporting entity operates).
Integrity: Integrity is holistic fidelity. Integrity relates to the fidelity of the report in its entirety, of all parts of a financial report, from all points of view. Integrity is holistic accuracy, accurate as a whole. Integrity is the quality or condition of being whole or undivided; completeness, entireness, unbroken state, uncorrupt. Integrity means that not only is each component of a financial report correct but all the pieces of the financial report fit together correctly, all things considered. The reported facts are logical and sensible as well as the relations between reported facts are logical and sensible.

To an accountant the notions of verification and validity and that a financial report must be complete, correct, consistent, and accurate as defined above are a statement of the obvious. Perhaps accountants have never really thought about the verification process in these terms, but accountants get this. Accountants have performed these tasks for hundreds of years. This is not new to accountants. Further, these traits which a financial report must possess are the obligations of those creating these reports; they are not options. Accountants don't pick and choose whether a financial report is to be true and fair; those traits must be true by definition.

What is new is that now accountants must rely on software to help them fulfill this obligation.

True and fair representation in more specific terms

Looking at the verification process in more specific terms, arguably the following would hold to be true of a financial report which represents the financial information of a reporting entity:

Comply with financial reporting standards: Clearly a financial report must comply with the rules (i.e., IFRS, US GAAP including applicable SEC rules, industry/activity practices, other common practices), and reporting entity choices where they have options.
Full inclusion/false inclusion: Everything which should be disclosed has been disclosed as deemed appropriate by such rules and the reporting entity choices.
Foots, cross casts, ticks and ties: A financial report foots, cross casts, and otherwise "ticks and ties". All mathematical relations must be intact. All nonnumeric relations must be sensible and logical.
All financial report formats convey the same message: A financial report can be articulated using paper and pencil, PDF, HTML, XBRL, or some other computer readable formats. While the format may change, the message communicated, the story told, should not change. Each format should communicate the same message, regardless of the medium used to convey that message.
Justifiable/defensible report characteristics: Facts reported and the characteristics which describe those reported facts should be both justifiable and defensible by the reporting entity.
Consistency between periods: Financial information expressed within one reporting period should be consistent with the financial information expressed within subsequent reporting periods, where appropriate. Changes between report elements which existed in both periods should be justifiable and defensible as opposed to arbitrary and random.
Consistency with peer group: If a reporting entity chooses one approach/report element and a peer chooses a different approach/report element; clearly some good, explainable reason should exist for such difference.
Useful, sensible, logical renderings: Renderings of facts, characteristics which describe the facts, parenthetical explanations which further describe such facts, and other representations should make sense, be logical, and ultimately be useful in understanding the information. While there may be differences of opinion as to how to format or present such information; there is significantly less or no dispute about the logic. Disclosures are informational, they relate to information without regard to formatting or other presentational artifacts. The term "notes" or "disclosure notes" or "footnotes" relate to organizing disclosures and are presentational in nature. Someone creating a financial report has far more latitude and discretion as to how to organize disclosures into disclosure notes than they do as to what must be disclosed.
Unambiguous business meaning: A financial report should be unambiguous to an informed reader. The business meaning of a financial report should be clear/unambiguous to the creator of the financial report and likewise clear/unambiguous to the users of that financial report. Both the creator and users should walk away with the same message or story, an identical understanding of the reported facts. Users may interpret the facts in different ways, but the facts should be the same for all parties.

Verification will always include both automated and manual processes. Automating processes can improve quality and reduce costs. But, not all processes can be automated. The judgement of an accountant cannot be automated.

What are your ideas about what a quality financial report looks like? If you have improvements to these ideas or of you have better ideas I would like to understand those ideas and why you believe they are better.