Digital Financial Reporting

In their paper Imagineering Audit 4.0 (figure 3 on page 10), Jun Dai and Miklos Vasarhelyi of Rutgers University use the term mirror world to describe the use of technology to create a virtual copy of the real world. A mirror world is defined as an ''informationally-enhanced virtual models or reflections of the physical world.''

The transaction cycles of a company and the interaction between the systems of the company and its customer, supplier, and bank are shown in the physical world on the bottom and the mirror world on the top in the cloud.

(Click image for larger view)

The graphic describes the relationships between inter-business parties in a supply chain and represents the connections between the real world in which such businesses operate and the mirror world within the accounting information systems of an enterprise resource planning (ERP) system of those economic entities.

These mirror worlds exist today in the databases that hold transaction information.  Within a company there tends to be fairly good integration.  Between companies in a supply chain is a different story.

The extent that the real world can be represented within some mirror world and automation can be achieve is open for debated.  However, what cannot be debated is that the real world and the mirror world need to use the same logic to explain each world.  Said another way, the business logic of the mirror world needs to match the business logic of the real world.

Logic a set of principles that forms a framework for correct reasoning. Logic is a process of deducing information correctly.  Logic is about the correct methods that can be used to prove a statement is true or false.  Logic tells us exactly what is meant.  Logic allows systems to be proven.

A logical statement, or a statement of fact, is a sentence that carries factual information that is either true or false. A statement is a piece of information.  A conditional statement is a type of statement that has an IF…THEN type format. Look at a statement as being a piece of information that is either correct or incorrect. A statement, a statement of fact, and a fact mean the same thing. (There are two assumptions that are held to be true.  First, a statement MUST be either true or false.  Second, a statement cannot be both true and false at the same time in the same context.)  Questions, commands, and opinions are not logical statements.

A model, or conceptual model, describes a possible world.  There exists some set of all possible models that can be used to describe real worlds that could exist.

A rule, or business rule or assertion, is a true statement with respect to some model of the real world that could possibly exist. (i.e. you cannot create rules that are true in worlds that can never exist)  A rule can be a mathematical expression.  A rule is a type of logical statement.

Logical entailment, or logical consequent, is when a logical statement follows from another statement or set of statements. Another name for logical entailment is inference.  The rules of inference provide a system in which we can produce new information (statements) from known information (statements).

A statement has a truth value with respect to some model.

The connectors AND, OR, and NOT are used to combined single statements to create compound statements.

Logic helps us understand the meanings of statements and produce new meaningful statements. Logic is the glue that holds strings of statements together and pins down the exact true unambiguous meaning of those statements.

Logic is the process of deducing information correctly; logic is not about deducing correct information.  Suppose you were give incorrect information.  Your statements can be false but the reasoning behind conclusion sound.  Other means are necessary to determine if a statement is true or false.

Facts, rules, and the possible models they represent can be stored in a knowledge based system if the facts and rules are put into machine-readable form. The machine-readable system can apply a problem solving logic using a problem solving method of a business rules engine to solve problems that normally would require human effort and thought to solve. The knowledge based system supplies an explanation and justification mechanism to help system users to understand the line of reasoning used and support conclusions reached by the machine-based knowledge based system, presents that information to the user of the system, and provide an audit trail. (i.e. how the system works cannot be a black box).

The fact database and knowledge base can be employed to effectively automate certain tasks involved in accounting processes and financial report creation processes.

The knowledge based system keeps track of things.  You can TELL the knowledge based system facts or rules; you can ASK for facts that exist in the knowledge based system or new facts that can be inferred using the rules of logic, existing facts, and existing rules. For example,

• TELL statement "Current assets for the economic entity ABC Company as of December 31, 2017 is the amount $200,000 (USD)."
• TELL statement "Assets for the economic entity ABC Company as of December 31, 2017 is the amount $1,000,000 (USD)."
• TELL statement "For commercial and industrial companies; Assets = Current Assets + Noncurrent Assets."
• TELL statement "ABC Company is a commercial and industrial company".
• ASK fact "What is the amount of Noncurrent Assets for ABC Company, a commercial and industrial company, as of December 31, 2017 in USD?"

The notions of TELLING and ASKING are guided by the rules of logic.  To understand the importance of these rules of logic, think about how such a system would work without such rules.  The result would be anarchy.

It is the rules of logic and the ability to represent facts and rules in machine-readable form but also in human-readable form that can enable the creation of a digital mirror world that can be used to automate accounting and reporting processes. Some call this "robotic finance" .  Others call this "machine intelligence". Still others refer to this as the "artificial intelligence revolution".

It is important to remember that logic is the process of deducing information correctly; logic is not about deducing correct information.  Deciding which information is correct and which is not correct is the responsibility of the model you choose to make use of to describe your reality.

Digital mirror worlds can be created that leverage the nature of double-entry bookkeeping using the XBRL technical syntax.  To do this, one needs to consider computer empathy to understand how to do this and the extent that accounting process automation can realistically be achieved."

********************

It was pointed out to me that another term to describe a digital mirror world is "digital twin". For more information see this video introduction to digital twin, this Wikipedia description, or search on "digital twin". Here is the digital twin consortium.