Digital Financial Reporting

We are in the midst of the fourth industrial revolution.  Are you ready?  Do you even know what Industry 4.0 is or what it means for you?

Here is a list of the four industrial revolutions:

1. Mechanization, water power, steam power.
2. Mass production, assembly line, electricity.
3. Computer and automation.
4. Cyber physical systems.

In their paper Imagineering Audit 4.0, Jun Dai and Miklos Vasarhelyi of Rutgers University provide a comprehensive and complete description of how industry will work in the future and therefore why a knowledge media such as XBRL is a critical required part of the information infrastructure for turning their vision into a reality.

Dai and Vasarhelyi describe Industry 4.0 as follows:

Originating in Europe and spreading to the US, Industry 4.0 emphasizes six major principles in its design and implementation: interoperability, virtualization, decentralization, real-time capability, service orientation, and modularity.  The objective of Industry 4.0 is to increase the flexibility of existing value chains by maximizing the transparency of inbound and outbound logistics, manufacturing, marketing, and all other business functions such as accounting, legislation, human resource, etc.

Basically, what Industry 4.0 means is that technologies will be used to dramatically improve the efficiency and effectiveness of businesses and other organizations.  What does this mean?  Some say that it means 47% of jobs in the United States are at risk from automation.

No one knows exactly what this fourth industrial revolution will mean, but based on the other three I think the fourth will turn out just fine if you make sure your skill set is up-to-date.  Information barbarians will likely not fare well.  It is far better to understand digital.

But let's get back to XBRL's role in Industry 4.0.  On page 16 of the paper, in the section titles "Standardization of information and data", Dai and Vasarhelyi point out the important role standards play in this new world:

To facilitate information exchange and analysis in Audit 4.0, regulators and standardization agencies should create suitable standards that define the formats and naming rules of commonly used data.

On page 14, the role of pre-determined business rules is pointed out:

In addition, business processes will be monitored against pre-determined rules to detect violations of key controls, and cross-verified via certain continuity equations.

As I have said before, business rules prevent anarchy.  For increased efficiency and effectiveness in business processes to be realized, business information exchange will need to work correctly.  For meaningful machine-based information exchange to work, you need pre-determined rules relating to technical syntax, domain semantics, and workflow.  It really is that straight forward.  This set of principles helps you understand the details.

Further, while it might not seem to be the case because of quality issues; XBRL-based reporting by public companies to the SEC helps accountants and others figure out how to use these sorts of technologies.  It is actually rather amazing that about 7,000 different companies can represent rather complex financial information and communicate that information to the SEC and get 98.96% of that information right.  On average, 84.7% of companies get all of the measured information right, and a set of 8 software vendors manage to get 97% of more of their reports correct as measured by the checks that I perform.

But 98.96% is not good enough.  What is good enough?  Six sigma is one target manufacturing has used, that is 99.99966% of everything being correct.  Is that good enough for information-based processes?  Well, it is a good minimum target to shoot for currently.

Conceived of in 1998 and turned into a global standard by the American Institute of Certified Public Accountants (AICPA) in 1999; XBRL is being perfected as a critical knowlege media ready for Industry 4.0.

If you are an accountant or other business professional and you want to understand digital better, I would suggest Part 1 - Foundation for Understanding: Background, Framework, Theory, Principles.

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PWC: Are you ready for tomorrow no matter what tomorrow brings? (4IR)