Digital Financial Reporting

We live in the Information Age (also known as the Computer Age, Digital Age, or New Media Age).  The Information Age was brought about by the Digital Revolution.

But many business professionals, including accounting professionals, are information barbarians. Their information tools are primitive and unsophisticated. Their information skills, let's just say, lack refinement and grace.

How did this happen? It seems to me there are three reasons:

1. A rapid pace of change.
2. College education is not keeping up.
3. Supplemental learning is not appropriate.

There could be other reasons.  How we got where we are is likely interesting, but what is more important is fixing the problem. 

One wrong approach to fixing the problem is the "learn to code" hysteria. As I have pointed out, I am not alone in thinking that "learn to code" is misguided. And besides, as I also pointed out, the Wired magazine article The End of Code points out that we won't be "coding" in the future, we will be training computers like we train dogs.  Sure, learning to code would not hurt anything.  But, learning to code will not turn an information barbarian into a civilized member of the information age.

Another wrong approach was proposed by the CFA Institute in a paper. While the CFA Institute did articulate an excellent vision of how structured data can be used to fix the currently inefficient process (i.e. barbaric) of financial reporting; they call for auditors to receive "increased education in technology".  Personally I think that is not the right approach.  The right approach is to provide auditors with better software tools.

I am not sure if is a complete solution to the problem, in fact I don't think that it is.  But part of the problem business professionals have will be solved by understanding a set of 15 principles that I find helpful when thinking about digital financial reporting.  Here is a summary:

1. Prudence dictates that using financial information from an XBRL-based digital financial report should not be a guessing game.
2. A near zero defect financial report is useful, a defective financial report is not.
3. Rules prevent anarchy.
4. The only way to achieve a meaningful exchange of information without disputes is with the prior existence of and agreement as to a standard set of technical syntax rules, business semantics rules, and workflow rules.
5. Explicitly stated information or reliably derived information is preferable to implicit information.
6. Digital financial reports can be guaranteed to be defect free using automated processes to the extent that machine-readable business rules exist.
7. When possible to effectively create, machine-based automated processes tend to be more desirable than human-based manual processes because they machine processes are more reliable and cost less.
8. Computers have limited reasoning capacity.
9. Business rules should be created by knowledgeable business professionals, not information technology professionals.
10. The stronger the problem solving logic, the more a machine can achieve.
11. Catastrophic logical failures are to be avoided at all cost; they cause systems to completely fail.
12. Complexity cannot be removed from a system, but complexity can be moved.
13. Part of a system is not really that useful.
14. Simplicity and simplistic are not the same thing.
15. Apply double-entry bookkeeping procedures, processes, and techniques to digital financial reports.

There is nothing technical or hard to understand about those principles.  Most are simply common sense.  But, if you don't have that framework it is hard to keep in mind what is important.

In another Wired article, Barack Obama, Neural Nets, Self-driving Cars, and the Future of the World, the ex-president pointed out another issue:

"There are gonna be a bunch of choices that you have to make, the classic problem being: If the car is driving, you can swerve to avoid hitting a pedestrian, but then you might hit a wall and kill yourself. It's a moral decision, and who's setting up those rules?"

As I previously pointed out, that statement which relates to self-driving cars points out two things that accounting professionals and other business professionals need to consider when thinking about something like intelligent XBRL-based digital financial reports:

1. WHO: who writes the rules, the logic, which software follows,
2. HOW: how do you write those rules and put them into machine-readable form and get all this to work reliably?

The changes will not be from sustaining innovations, they will be disruptive innovations.  Things like XBRL are new knowledge media that offer completely new capabilities.  As the currently barbaric financial reporting processes are transformed, one should consider learning from other such transformations.  For example, the evolution of drafting from vellum to computer, can be learned from. Emulate the good, avoid the bad.

In my view, what business professionals need to understand to thrive in the information age are the following two fundamental things:

• First, business professionals need to understand that computers work using the rules of formal logic.  Formal logic is a discipline of philosophy.  Computers work based on the rules of mathematics. Mathematics is based on the rules of formal logic.  Understanding how to think using formal logic will help you understand the real capabilities of computers.
• Second, business professionals need to understand a few basics about knowledge engineering. This will allow business professionals to more effectively communicate with information technology professionals.

That is really it. None of this needs to be a mystery or some "black box" that you don't understand how to properly employ. Artificial intelligence is more than a buzz word; but right now there is a lot of hype related to that word.  On the one hand, don't fall for the sales pitches of the many snake oil salesmen.  On the other hand, don't ignore good capabilities.