Digital Financial Reporting

Some people prefer the "rush to detail" approach, prematurely focusing on detailed tasks before they have considered the broader goals and objectives. This approach is like starting to build a house by laying bricks, rather than drawing plans and establishing foundations.  It is like taking a journey on a ship and not bringing a compass, a map, or even a rudder.

Me, I don't use that "rush to detail" type of an approach.  I prefer building on a solid foundation.  I prefer establishing a framework, discovering principles, creating a theory, and then testing that theory to be sure everything works as expected.

Over the past 11 years I have maintained a blog related to XBRL-based digital financial reporting.  That blog is like my "lab notebook".  Here are all the entries into my lab notebook.

Periodically, I take the information from my lab notebook and organize it, summarize it, synthesize it, reduce the information to its essence; the goal is to put the information into more useful form.  Here is that summary of all of my notes.

Myself and others have done a lot of experiments.  You can see those experiments throughout my lab notebook entries.

The grandest experiment is Pesseract. Today, Pesseract is a working proof of concept.  Creating Pesseract helped a software engineer and I figure out what it would take to create an expert system for creating financial reports and exactly how to do it. If you are currious and motivated, you can use Pesseract to think about and understand XBRL-based digital financial reporting.  I know, because that is how I learned.

You cannot understand these conclusions if you don't have the correct and complete set of background information.  Trying to understand what is happening is like trying to walk around New York City with a map of Chicago.  A paradigm shift is occurring.  You will need a new map, old maps will not work.  Here is the map that I created: Computer Empathy.  That map is not perfect, but it is the best I could do.  Perhaps someone else can take a stab at it and do better.

Here are the conclusions that I reached related to XBRL-based digital financial reporting, information that supports those conclusions, and resources that might help you understand my conclusions or that you can use to reach your own and perhaps different conclusions.

1. XBRL-based general purpose financial reports provide value: While perhaps not all financial reports will be digital, some portion will be digital and that portion that is digital will increase over time. Here is my case for XBRL-based general purpose financial reports.
2. High-quality XBRL-based reports are necessary: Financial reports are high-fidelity, high-resolution, high-quality information exchange mechanisms. Whether the format is paper, e-paper, or XBRL; the quality level must be the same.  Quality is measurable.  High-quality is achievable.
3. XBRL does work if used correctly: XBRL does work if it is used correctly.  Most regulators are not using XBRL correctly, they are leaving things out.  To make XBRL work internally within your organization or if people are going to use XBRL in situations where it's use is not mandated by some regulator, it MUST WORK.  It can work. Understanding the ontology spectrum and how to implement the ontology spectum using XBRL is critical information. Here is the method that I use for implementing XBRL and the framework that I use to do it.
4. XBRL can provide benefits related to accounting, reporting, auditing, and analysis in a digital environment: XBRL is not just for financial reporting.  Many, many processes will be impacted. While I very much doubt that all of Deloitte's vision of "The Finance Factory" will be realized any time soon, the impact will be very significant. The modern finance platform will be created. A financial transformation will occur. It is already occurring.
5. Digital distributed ledgers is a useful technology: The impact of digital distributed ledgers will be significant.  XBRL and digital distributed ledgers are a match made in heaven.
6. The technology falacy points out that people create change, technology enables change: Technology does not create change, people create change. Technology enables people to create change.  PWC, EY, KPMG, and Deloitte are all telling their clients that the fourth industrial revolution is real.  Their audit departments might not believe that yet, but they will eventually.
7. Best practices are superior because they work: A best practice is a method or technique that has been generally accepted as superior to any known alternatives because it produces results that are superior to those achieved by other means or because it has become a standard way of doing things. Just because someone has a position of authority does not make their approach a best practice.  Here are proven best practices for evaluating the quality of an XBRL-based financial report.
8. Know-how is knowledge: One type of practical knowledge is know-how; how to accomplish something.
9. Elegant and simple is better than a complicated kludge: A kluge is a term from the engineering and computer science world that refers to something that is convoluted and messy but gets the job done. Elegance is the quality of being pleasingly ingenious, simple, and neat. Elegance is about beating down complexity. Creating something complex is easy. Creating something simple and elegant is hard work. XBRL-based financial reporting will be elegant.
10. Rome was not built in a day: XBRL-based financial reporting is an evolution that will unfold over time. There are four common mistakes that both business professionals and technical professionals tend to makerelated to XBRL-based reporting: (1) Thinking "data" when they should be thinking "information"; (2) Not understanding the ontology spectrum; (3) Underestimating the power of classification; and (3) Misunderstanding a machine's capabilities to acquire knowledge.

I say question conventional wisdom related to creating XBRL-based financial reports.  When US GAAP and IFRS filings to the SEC both contain errors related to high-level accounting relations, something is obviously not right.  Ask yourself: What might be wrong?  How do you fix it?  Conventional wisdom is not necessarily true.  These are the four common errors in thinking that I encounter repeatedly.

Don't know where to start to get your head around XBRL-based digital financial reproting?  Start here with this six minute video: How XBRL Works.  After that, read this. And then this. And then fiddle with this. Maybe even download this.