Digital Financial Reporting

No one really disputes the fact that old school processes, practices, and procedures for creating external financial reports contain inefficiencies.  For example, consider these four sources:

• CFA Institute: calls for "...greater efficiencies within the current inefficient system" [of creating financial reports].
• Gartner: "...average Fortune 1000 company used more than 800 spreadsheets to prepare its financial statements"
• Ventana Research: "...for larger companies, assembling the periodic external reports typically is an inefficient and error-prone process."
• PriceWaterhouseCoopers: "...old school manual processes..." and "commonly cut and pasted, rekeyed, or manually transferred into word processing and spreadsheet applications used for report assembly and review process steps"

Have the stars aligned, creating an opportunity for reinventing these processes?  I think so.

What has changed? 

The answer is that one thing has changed which has enabled another thing.  If you read the first PDF I referenced above, you will notice that each of those four organizations hails XBRL or "structured data" as the way to to make financial reporting processes more efficient.

That is not quite right.  XBRL or structure data is not the change that will make processes more efficient; structured data enables the change to occur.  This video, How XBRL Works (which now has over 46,000 views), helps you see what structured information is as contrast to unstructured information.

So, XBRL or structured data is the enabler of a change, it is not the change itself.

Again I ask, then what changed?  Well, two things changed.

First, the structured information lets a computer effectively address the individual pieces of a financial report.  Because of the structure, software applications can do things with the individual pieces of the report.  Basically, you can take measurements of structured information; that was impossible when financial reports were unstructured information.

Second, because you can address or measure or otherwise work with the individual pieces that make up a financial report; more processes, procedures, and other tasks used in the report creation process can be automated.

Old school review processes are almost 100% manual.  It does not have to be this way.  On the other hand, there is ZERO probability that 100% of the financial report creation process will be automated.  That is absurd.

What percentage CAN effectively be automated though?  Some percentage.  That percentage is greater than 1%.  Is it 10%?  Is it 20%?  Is it 50%?  More than that?

Further, there will no doubt be quality improvements also.  There is NO WAY that a process that is nearly 100% manual can be of perfect quality.  So, there is some level of quality problems that exist in the current old school processes.  But, you cannot see those problems or measure the problems because, you guessed it, the current financial reports are unstructured and you cannot address the pieces of a report.

Just because you cannot measure quality problems does not mean that quality problems do not exist.  They exist.

How exactly will financial report creation processes be made more efficient?  The answer to that question is machine-readable business rules.  Remember, business rules prevent anarchy.

More on that later...so stay tuned!

But have the stars aligned enough to allow for a real change to the old school manual processes of creating an external financial report to truly be replaced?  That depends entirely on whether how clever software creators are in making all the pieces of knowledge based systems usable by business professionals.

It really is that simple.  The law of conservation of complexity states very clearly, you leave one required piece out, your system will simply not work.

There is zero probability that professional accountants will want to go to the IT department as part of getting the external financial reports out.  That will NEVER happen.  They would rather struggle with the currently manual processes than lose any control over the process. Proof of that: current processes.

Some software creators have provided small incremental improvements to processes.  If knowledge based systems can effectively be utilized in financial report creation processes, that will be a disruptive innovation, not just another incremental improvement.