Digital Financial Reporting

The document, Auditing XBRL-based Financial Reports, proves that an audit strategy can be created for XBRL-based financial reports.

Here are the cliff notes:

A financial report is an allowed interpretation of an expression of the financial position and financial performance of an economic entity per some set of statutory and regulatory rules.  Here-to-for, that expression has been in a form that is only readable by humans. However, XBRL and other machine-readable formats change that, making those expressions readable by both humans and by machine-based processes.

Single-entry accounting is how ‘everyone’ would do accounting. In fact, that is how accounting was done before double-entry accounting was invented. Double-entry accounting was the invention of medieval merchants and was first documented by the Italian mathematician and Franciscan Friar Luca Pacioli.

Double-entry accounting adds an additional important property to the accounting system, that of a clear strategy to identify errors and to remove the errors from the system. Even better, double-entry accounting has a side effect of clearly firewalling errors as either accident or fraud. This then leads to an audit strategy.  Double-entry accounting is how professional accountants do accounting.

An XBRL-based financial report is not only a machine-readable format; it also is a machine-readable logical system and has the potential to be a well-defined and fully expressed logical system.  A well-defined logical system, when fully expressed, will be properly functioning and demonstrably consistent, valid, sound, and complete.  These properties can be leveraged to offer a systematic audit strategy for XBRL-based financial reports.

Essentially, an XBRL-based financial report is a set of declarative statements provided in global standard XBRL format.  Logic programming software applications such as Prolog, Datalog, Clips, and Answer Set Programming can provide feedback as to whether these statements are consistent, valid, sound, complete and otherwise properly functioning.  Even XBRL processors and XBRL formula processors can effectively prove that XBRL-based financial reports are properly functioning to a large degree.

“It must be remembered that there is nothing more difficult to plan, more doubtful of success, nor more dangerous to manage than a new system. For the initiator has the enmity of all who would profit by the preservation of the old institution and merely lukewarm defenders in those who gain by the new ones.”  Niccolò Machiavelli

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Assurance on XBRL Instance Document: A Conceptual Framework of Assertions

Digital Auditing: Modernizing Government Financial Statement Audit Approach

xAudit: Auditing Representations in XBRL Based Documents