Digital Financial Reporting

In his book Data and Reality (Third Edition) its author William Kent makes the following observation at the beginning of chapter 9 Philosophy:

"There is an important difference between truth and utility.  We want things to be useful - at least in this business; otherwise we'd be philosophers and artists."

Kent point out that representing things so that automated computer processes can deal with them effectively and perform useful work is a duality. On the one hand, reality can be complicated and in an absolute sense there really is no one singular objective reality that everyone agrees with.  But on the other hand, if we can share a common enough view of reality for most of our working purposes then reality does appear to be objective and stable.

On the one hand, trying to describe every detail of reality so that a computer process can understand something is a fools errand that can never be successful.  On the other hand, dumbing reality down too much and you might be able to create something but it will not be useful.  The key is striking the right balance between what is important and what is a negligible difference that can be ignored.

If the members of a society can effectively agree to share some common purpose and create some objective and stable enough view of reality then effective tools can be constructed.

Paraphrasing Kent, useful tools have well-defined parts and predictable behavior.  These tools lend themselves to effectively solving problems we consider important.  The justification for a tool is economic: the cost of the production and ongoing maintenance of the tool as contrast to the value of the problem solving functionality provided by the tool.

The larger the group trying to agree, the harder it is for that group to reach agreement.  A logical data model is much more durable than a physical data model because the logical model represents information, not how information is compromised by a technology.

Within the institution of accounting, a small group within the larger society, we have already agreed on many things: the general purpose financial report, the double entry accounting model, generally accepted accounting standards (US GAAP, IFRS, IPSAS, GAS, UK GAAP, etc.), the XBRL technical syntax, and even the Logical Theory Describing Financial Report if you look closely at XBRL-based financial reports submitted to the U.S. Securities and Exchange Commission and reverse engineer the logical theory).

It will be interesting to watch the impact on financial accounting, reporting, auditing, and analysis.  All that is left is for accountants to understand the new rules. The new information economy has different rules than the previous industrial economy but most people have not figured that out yet.