Digital Financial Reporting

In a prior blog post I briefly described expert systems. I provided a couple of definitions of an expert system.  I am still synthesizing and summarizing information to improve the description of an expert system. Here is my best description as of this point:

Expert systems are computer programs that are built to mimic human behavior and knowledge. The computer program performs tasks that would otherwise be performed by a human expert.  A model of the expertise of a domain of knowledge of the best practitioners or experts is put into machine-readable form and the expert system reaches conclusions or takes actions based on that information.

Expert systems are a branch of artificial intelligence. So how does an expert system "mimic human behavior"?  How is knowledge "put into machine-readable form"?  How can tasks be performed by a computer that represents knowlege of "best practitioners or experts"?  This is how that is achieved.

A software based expert system has four primary components:

• Knowledge base: A knowledge base is a set of universally applicable rules created based on the experience and knowledge of a domain expert generally articulated in the form of IF…THEN statements or a form that can be converted to an IF...THEN form. A knowledge base is "fixed" in that its rules are universally relevant to all situations covered by the knowledge base.  Not all rules are relevant to every situation.  But where a rule is applicable it is universally applicable.  All knowledge base information is machine-readable.
• Database of facts: A database of facts is a set of observations about some current situation or instance. The database of facts is "flexible" in that they apply to the current situation. The database of facts is machine-readable.
• Inference engine: An inference engine takes existing information in the knowledge base and the database of facts and is used to reach conclusions or take actions.  The inference engine is the machine that processes the information.
• Explanation mechanism: The explanation mechanism explains and justifies how a conclusion or conclusions are reached.  It walks you through which facts and which rules were used to reach a conclusion. The explanation mechanism is the results of processing the information using the inference engine and justifies why the conclusion was reached.

The four primary components of an expert system are generally wrapped within some graphical user interface that presents the expert system to the user of the software based system.

How does all this relate to XBRL?

XBRL is a global-standard syntax that can be used to structure information which can then be used by expert systems.  In the XBRL world, the set of XBRL taxonomies including the relations expressed in XBRL calculations, XBRL definition relations, and XBRL Formula makes up the knowledge base.  The XBRL instance is the database of facts.  An XBRL processor plus the XBRL Formula processor performs the role of the inference engine. Reports generated by the XBRL and XBRL Formula processor and other such computer software tools provide the explanation/justification mechanism.

So why don't XBRL-based reports and software seem to act like expert systems these days?  That is simply because pieces are missing from systems that have been implemented.  Primarily there are two missing pieces:

1. Missing machine-readable rules from the XBRL taxonomy that makes up the knowledge base and
2. Missing processing from the XBRL Formula processor.

Very few XBRL implementations these days provide adequate machine-readable business rules using XBRL Formula and XBRL definition relations.  Software generally does not provide a complete XBRL processor, let alone an XBRL Formula processor or inference engine capabilities.  Current XBRL processors generally do not support chaining because XBRL provides no standard chaining model.  Further, most software developers creating software are not using the techniques offered by artificial intelligence technologies for creating their software.

What does this mean?  It means XBRL-based reports that are filled with errors.  It means that there is a lot of upside potential as software engineers/architects understand and correct the mistakes they have made. Ultimately, I believe, that it means the future of digital financial reporting and digital business reporting will be bright.

Imagine having "Legos" that can be used to construct your own expert system.  The complexity of such systems hidden from users of the software.  What I believe is going to happen is that software tools will become available that make it so the cost of creating and the knowledge required to create an expert system will both drop exponentially.  This will put powerful expert systems into the hands of business professionals.

Why can this happen?  Well, first because in the past such expert systems were created the way most things were manufactured prior to Eli Whitney introduced the notion of interchangeable parts.  Global standard specifications such as XBRL help make standardization possible.  Standards allow for interchangable parts to be created.  Second, because usage patterns can be turned into "Legos" that make it possible for business professionals to perform the knowledge engineering tasks necessary to create such systems.  The strict multidimensional model which defines things like "fact" of the information processed makes this possible.  Third, because more and more information is structured there are more and more opportunities to apply expert systems will appear.  Finally, because of the connectivity offered by the internet models and other metadata can be easily shared and used by such systems.  Digital machine-readable knowledge is collateral in today's increasingly digital world.

What do you think?