Most accountants don't recognize this yet, but many of the current practices used for creating financial reports are obsolete. It is true that a new paradigm has not yet been fully and completely worked out yet but that new paradigm is well on it's way.
Remember the good ole days when we used to create financial reports using clay tablets?
Accounting and reporting has moved beyond clay tablet first to papyrus then to paper. In the 1970s and 1980s, paper was replaced by word processors and electronic spreadsheets. Effectively "e-paper". Now we are moving to digital.
Single entry ledgers were improved by using two synchronized ledgers (i.e. double entry accounting). Double entry ledgers are about to be improved by adding a third synchronized ledger (i.e. triple entry accounting).
It is time for the next step in the evolution of accounting and the financial report. No one can really say with certainty what the next step in this evolution will bring, but there are a few things that are certain.
- Some sort of change is inevitable.
- Modern technologies exist that will be employed such as artificial intelligence, structured information, digital distributed ledgers, knowledge graphs, etc.
- The same technologies that cause the problems of information overload and information complexity will be used to solve those same problems.
- Standards will play a significant role.
Here are a few prototypes that I have created that help accountants understand that change is inevitable and what these new accounting, reporting, auditing, and analysis tools might look like.
- Pacioli, a Toolbox for Auditors: If an accountant cannot prove to themselves or to others that something like an XBRL-based financial report is (a) properly functioning and (b) conveying the meaning that is intended to be conveyed; then digital financial reporting is a non-starter. So, that tool for making sure financial reports are correct is fundamentally necessary.
- Pesseract, an Expert System for Creating Financial Reports: The creation of financial reports needs to be "self-service", meaning accountants need to be able to fundamentally create the reports. Pesseract is a working proof of concept for creating XBRL-based digital financial reports. (If you are an accountant and want a license to try this software out, please contact me and I will send you a license good for one year.) This free, open source tool can get you started with understanding digital financial reports.
- Financial Reporting Metadata: Without high-quality metadata, digital financial reporting is a non-starter because it would be impossible to (a) meet the demands of robust financial reporting schemes such as US GAAP, IFRS, and others and (b) make it impossible to create software applications that are easy enough for the average professional accountant to use.
- Proven, Best Practices based Framework and Method: Accounting, reporting, auditing, and analysis is complex. If you read through the Essence of Accounting you will understand the specific complexities. Per the law of conservation of complexity you cannot remove complexity from a system; however, you can move the complexity around. Being smart and clever plus hiding complexity from end users can make XBRL-based digital financial reporting work effectively and be easy to use. Per the notion of irreducible complexity, you cannot simply remove something that is necessary from a system and expect that system to work effectively. Removing complexity is not an alternative, but hiding complexity can work effectively. My method shows you how to achieve this. My framework and method works effectively per implementations in four software applications: Logical Contract's Pacioli, XBRL Cloud's Evidence Package, XBRLQuery, and Pesseract which is a working proof of concept.
Here is an example of what is achievable. Because of the mathematical foundations of double entry accounting it is particularly well suited to leveraging computers to achieve work. And while it is the case that accounting, reporting, auditing, and analysis will be the first areas of knowledge to digitize because they are so well suited; they will not be the last. Computational Professional Services is a real thing. Think electronic semantic spreadsheet.
Things are already changing; the signs are all around you if you look. Be careful not to hold on to obsolete practices too long as that can reduce your value. Here is everything you need to master XBRL-based digital financial reporting.