Digital Financial Reporting

You can probably imagine that CAD (computer added design) changed the work practices of architects, engineers, and builders. Likewise, digital financial reporting will change the work practices of accountants and financial analysts over the coming years.  Accounting education will likewise change.

Think about the parallels.  Architects used to create blueprints using pencil and paper.  Now they use CAD software. CAD software is not something where you draw lines, squares, and circles. You work with architectural objects in CAD software.  Consider this description from the AutoCAD Wikipedia page:

Architectural objects have a relationship to one another and interact with each other intelligently. For example, a window has a relationship to the wall that contains it. If you move or delete the wall, the window reacts accordingly.

In addition, intelligent architectural objects maintain dynamic links with construction documents and specifications, resulting in more accurate project deliverables. When someone deletes or modifies a door, for example, the door schedule can be automatically updated. Spaces and areas update automatically when certain elements are changed, calculations such as square footage are always up to date.

A CAD application understands architectural objects.  It deals with windows, walls, doors, light fixtures, etc.  Consider a digital financial reporting application. Now, that is not how the current "version 1.0" generation digital financial reporting software works today. And that is exactly why there are errors in SEC XBRL financial filings. CAD applications don't let you build things that won't work.  That is one of the value propositions of CAD.

The same will be true of digital financial reporting tools.  Unlike Microsoft Word which is used to create 85% of external financial reports today but knows nothing about a financial report; a digital financial reporting to will understand that:

• external financial reports have balance sheets (like 100% of SEC XBRL financial filings)
• balance sheets have assets and balance sheets have liabilities and equity (like 100% of SEC XBRL financial filings, see the fundamental accounting concepts)
• assets = liabilities and equity (like on the balance sheets of 100% of SEC XBRL financial filings)
• the financial reporting conceptual framework
• the Financial Report Semantics and Dynamics Theory
• US GAAP disclosure topics (and maybe IFRS also)
• US GAAP disclosures
• the financial report ontology
• financial disclosure algorithms
• the model structure of a business report
• accounting concept arrangement patterns
• member arrangement patterns or whole-part breakdowns
• business rules
• reporting templates which embody the stuff mentioned above
• and much more...

Paper-based and even electronic PDF or HTML financial reports are readable by humans. Digital financial reports are readable by both humans and machines.

Machines can therefore do things to help humans create or use digital financial reports that they could not help with before. This help from machines will reduce costs and increase quality.

If you are a software vendor and you don't understand these things, you are likely building the wrong software. A good way to learn is to understand the seven minimum criteria for evaluating SEC XBRL financial filings. It is somewhat of a digital financial reporting starter kit.

If you are an accountant and you don't understand these things you will become increasingly out of touch with financial reporting over the coming years.  How many years? That is hard to tell.

Digital is not software, it is a mindset.  Thinking digital is the paradigm that is winning. Not changing has costs associated with it.  Ask Kodak.

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

Digital financial reporting is a disruptive technology which will bring a very different value proposition than has been available previously.

Watch out for Robocop.