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Accountants Understand Utility of Ontology for Reducing Ambiguity Conceptual Framework

Like anything else created by humans; accounting standards can be vague, inconsistent, and ambiguous unless care, discipline, and rigor are used to clearly, accurately, and precisely express the true intent of those standards.  This includes both US GAAP and IFRS accounting standards.

When humans try and describe complicated things such as accounting standards in books it is easy to inadvertently make mistakes which contribute to vagueness, inconsistencies, and ambiguities because the only way to check what you have written is manually using humans.  But when one uses machine-readable formats to express such information then machines can be used to check to make sure there is no vagueness, inconsistencies, or ambiguities.

While it is unlikely that all vagueness, inconsistencies, and ambiguities could ever all be removed; they certainly can be reduced if good tools are leveraged.

The paper, An analysis of fundamental concepts in the conceptual framework using ontology technologies, written by Marthinus Cornelius Gerber, Aurona Jacoba Gerber, Alta van der Merwe point out how tools such as ontologies and reasoners can be used to improve financial reporting standards.  Here is the abstract of that paper:

The interpretation of financial data obtained from the accounting process for reporting purposes is regulated by financial accounting standards (FAS). The history and mechanisms used for the development of 'The Conceptual Framework for Financial Reporting’ (the Conceptual Framework) as well as the financial accounting standards resulted in impressive volumes of material that guides modern financial reporting practices, but unfortunately, as is often the case with textual manuscripts, it contains descriptions that are vague, inconsistent or ambiguous. As part of the on-going initiatives to improve International Financial Reporting Standards (IFRS), the International Accounting Standards Board (IASB) promotes the development of principle-based IFRS, which aim to address the problems of vagueness, inconsistency and ambiguity.

This paper reports on the findings of a design science research (DSR) project that, as artefact, developed a first version ontology-based formal language representing the definitions of asset, liability and equity (the fundamental elements of the statement of financial position as defined in the Conceptual Framework) through the application of knowledge representation (ontology) techniques as used within computing. We suggest that this artefact may assist with addressing vagueness, inconsistencies and ambiguities within the definitions of the Conceptual Framework. Based on our findings, we include suggestions for the further development of a formal language and approach to assist the formulation of the Conceptual Framework. The project focuses on the Conceptual Framework for Financial Reporting after the incorporation of Phase A in the convergence project between the Financial Accounting Standards Board (FASB) and IASB.

While it is true that things such as machine-readable ontologies and reasoners can be used to reduce vagueness, inconsistency, and ambiguity from the financial reporting conceptual framework; they can also be used to make sure that financial reports are created consistent to that conceptual framework.

The machine-readable business rules expressed within an ontology both describe some problem domain such as that of financial reporting and check to see if financial reports are created consistent with that description.  The utility of machine-readable business rules does not make a lot of sense if you think about the paper-based or unstructured financial reports created for the past hundred years.

However, when you think about digital financial reports such as XBRL-based public company financial reports submitted to the SEC which are structured and therefore machine-readable; the utility of machine-readable business rules makes far more sense.

Professional accountants use many tools which are only readable by humans.  A good example is the disclosure checklist, a memory jogger used in the process of creating financial reports.

As the authors of the document point out, in the accounting world we can live with clear, known alternatives and professional judgment to pick and choose amongst those known alternatives; applying the best alternative all things considered.  What we cannot live with is diverse interpretations with different results based on the "same definitions and principles" which are really caused by vagueness, inconsistencies, and ambiguities in the definitions and principles.

Digital is not software, it is a mindset. Digital financial reporting is closer than you might think.  Never heard of the term "ontology"? Smart professional accountants are improving their knowlege engineering skills.

Posted on Sunday, April 19, 2015 at 08:33AM by Registered CommenterCharlie in | CommentsPost a Comment

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