Digital Financial Reporting

One approach to understanding something that I use is to try and create a spectrum of all possible options.  In applying this to a situation that I have been involved with for 15 years, I think I realized something. While people use the term "standard" and think they understand the term, it seems as though a lot of people are misinterpreting the term.  Let me explain.

First, we need to be sure we are on the same page when it comes to certain specific terms.  These are the terms I am using with definitions provided by Google and the Merriam-Webster dictionary. The terms are broken into sets with go together: (bear with me here)

Term set 1:

• Standard: used or accepted as normal or average (Google); something established by authority, custom, or general consent as a model or example (MW)
• Arbitrary: based on random choice or personal whim, rather than any reason or system (Google); depending on individual discretion (as of a judge) and not fixed by law (MW)

Term set 2:

• Nuance: a subtle difference in or shade of meaning, expression, or sound (Google); a subtle distinction or variation (MW)
• Subtle: so delicate or precise as to be difficult to analyze or describe (Google); hard to notice or see : not obvious (MW)
• Negligible: so small or unimportant as to be not worth considering; insignificant (Google); so small or unimportant or of so little consequence as to warrant little or no attention (MW)

Term set 3:

• Objective: not influenced by personal feelings or opinions in considering and representing facts (Google); based on facts rather than feelings or opinions : not influenced by feelings (MW)
• Subjective: based on or influenced by personal feelings, tastes, or opinions (Google); based on feelings or opinions rather than facts; relating to the way a person experiences things in his or her own mind (MW)
• Judgment: the ability to make considered decisions or come to sensible conclusions (Google); an opinion or decision that is based on careful thought (MW)

 Term set 4:

• Policy: a course or principle of action adopted or proposed by a government, party, business, or individual (Google); definite course or method of action selected from among alternatives and in light of given conditions to guide and determine present and future decisions (MW)
• Requirement: a thing that is needed or wanted (Google); something that is needed or that must be done (MW)
• Choice: an act of selecting or making a decision when faced with two or more possibilities (Google); the act of choosing : the act of picking or deciding between two or more possibilities (MW)
• Option: a thing that is or may be chosen (Google); the opportunity or ability to choose something or to choose between two or more things (MW)

So this is my argument, given the terms as used above:

The purpose of a standard is to create some accepted "norm". As I explained in a prior blog post, there are certain advantages to creating and agreeing on standards.

To create a shared reality to achieve a this specific purpose: To arrive at a shared, common enough view of "true and fair representation of financial information" such that most of our working purposes, so that reality does appear to be objective and stable. So that you can query financial information reliably, predictably, repeatedly, safely.

By way of contrast, a standard is different than arbitrary.  To arrive at standard, personal preference, individual preference, individual discretion, convenience, randomness and such are given up to arrive at some greater good.

Now, what is given up?  Things that are negligible are given up. Things that are subjective are given up. It should NOT BE THE CASE that important nuances, subtleties, or things that are objective be given up.  If the nuances, subtleties and other things which are in fact objective are not considered, the system becomes too simplistic and such a poor representation of reality that the system is not useful.

How can you tell the difference between something that is negligible and something that is an important nuance, subtlety, or something else which is objective?  That is the nature of the agreement by which one arrives at some standard.  To make this distinction between what is important and what is not important requires two things: professional judgment and an understanding of the pros and cons of the decision.

In another blog post I elaborated on why this process can be difficult. Getting computers to do things is not that tough for IT professionals. Look at all the things computers do for us today.  Consider accounting systems.  Sure beats keeping the books using paper journals and ledgers.  Accountants provided a lot of input over the years to get the accounting systems to work as they need the accounting systems to work.

Now we are taking things up a notch.  Now IT professionals can help business professionals create financial statements in more efficient and effective ways.  The question is not whether this is possible or whether it will be done.  It will be done.

The question is, will that software be more standard and therefore do more for accountants and cost less; or will it be less standard and cost more. Will the software be more standard and therefore less ambigous and therefore easier to use; or will it be less standard, have more options, and therefore be harder to use.

Financial reports have certain requirements? Of course.  Do accountants have choices? Sure they do.  US GAAP has options.  Once certain choices are made by a company, then a policy is set as to how things are to be done.

So, whether disclosures will be digitized is not what should be at the forefront of a professional accountants mind. What should be on their mind is whether it will be expensive or will it be less expensive.  The more standard things are, the less they will cost and the easier they can be to use.  The more arbitrary they are, the more they will cost and the harder they will be to use.  Another term for arbitrary is proprietary.  Software vendors love proprietary.  Proprietary creates software lock in which is good for software vendors, but bad for software buyers.

None of this has to do with dumbing down financial reports, taking away important areas of flexibility which enable reporting entities to communicate nuances, important subtle distinctions or other objective considerations.  In fact, dumbing down financial reporting needs to be avoided at all costs.

But to the extent negligible and therefore unimportant individual personal preferences can be eliminated, financial reporting can be made less costly, more timely, and higher quality by leveraging machines to automate certain specific tasks.  Not all tasks. Just the tasks which make sense for computers to perform.