Digital Financial Reporting

This is what Niccolo Machiavelli said about creating new systems back in the 1500's.  Just as applicable today:

It must be remembered that there is nothing more difficult to plan, more doubtful of success, nor more dangerous to manage than a new system. For the initiator has the enmity of all who would profit by the preservation of the old institution and merely lukewarm defenders in those who gain by the new ones.

Niccolo Machiavelli

 Another version of the same quote:

It must be considered that there is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to initiate a new order of things.  For the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new order, this lukewarmness arising partly from fear of their adversaries, who have the laws in their favour; and partly from the incredulity of mankind, who do not truly believe in anything new until they have had the actual experience of it.

Niccola Machiavelli

A new order of things for financial reporting has been arising.  The pieces are slowly falling into place.  The ability to structure information using the XBRL format is only one piece of the puzzle.  Here are other pieces as I see it:

• US GAAP: If US GAAP did not exist, digital financial reporting would not be possible because the necessary agreed upon standard financial reporting semantics would not exist.  US GAAP is that agreement and has been a work-in-progress for a hundred years.  IFRS is another effort to create standard financial reporting semantics.  IFRS was significantly influenced by US GAAP.
• Internet: Without the low-cost connectivity and standards of the Internet, digital financial reporting could never be possible.  My personal view is that "the Web" is not nearly as important as the internet.
• Machine-readable Version of Key Portions of US GAAP: The US GAAP XBRL Taxonomy is a machine-readable version of the portions of US GAAP necessary for digital financial reporting. The US GAAP XBRL Taxonomy is also readable by humans.
• Machine-readable Business Rules: Article 9 of The Business Rules Manifesto states that business rules are "Of, By, and For Business People, Not IT People". Article 9 has three important sub sections:
  • 9.1. Rules should arise from knowledgeable business people.
  • 9.2. Business people should have tools available to help them formulate, validate, and manage rules. 
  • 9.3. Business people should have tools available to help them verify business rules against each other for consistency.
• Software Tools that Understands Business Rules: You can have all the machine-readable business rules that you want; but if you don't have any machines to read the rules, the value of the rules is hard to understand.

More and more machine-readable business rules are becoming available.  For example, the Financial Report Ontology is a working prototype of some of those rules.  For example, the machine-readable information about financial statement disclosures (and human-readable) summarizes many common sense, logical, mathematical, and other obvious business rules.

To the extent that financial information is consistent with business rules, that financial information will be reusable by automated machine-based processes of all sorts.  Information which is not consistent with established business rules indicates inconsistencies within the system.

In a distributed system such as financial reporting where you have thousands and perhaps millions of financial reports being created by millions of reporting entities taking the time to create formal, standard, well-thought-out business rules to control the system is essential to making the system work correctly.

None of this happens by accident.  It takes intension, conscious effort, discipline, rigor, skillful execution, and persistence.  The result does not need to be complex, the system can be sophisticated and also simple and elegant.