BLOG: Digital Financial Reporting
This is a blog for information relating to digital financial reporting. It is for innovators and early adopters who are ushering in a new era of digital financial reporting.
Much of the information contained in this blog is summarized, condensed, better organized and articulated in my book XBRL for Dummies and in the three documents on this digital financial reporting page.
If I had a tool for creating zero defect (sigma level 6 quality) US GAAP and/or IFRS general purpose financial reports leveraging intelligent XBRL-based structured information and I could create those reports faster than you can create financial reports today, incurring less costs than you incur today, and with a higher quality level than the financial reports that you create today; then would you buy that tool?
What if the tool had all the necessary pieces, it was complete. What if the tool was easy to use. What if the tool was inexpensive.
Do you know how to build such a tool? Do you know the proper technologies to employ to create the tool? If you are a business professional, do you understand how to specify such a tool?
Leap frog the competition: Intelligent XBRL-based Digital Financial Reporting
No magic. Skillful execution. Attention to detail. Quality of a master craftsmen. Engineering excellence. Steve Jobs would be happy.
Purpose-build for disclosure management and financial report creation, intelligent XBRL-based digital financial reporting products collect information about financial report creation projects and allow this information to be coordinated across all other representations of the project, so that every statement, policy, and disclosure is based on internally consistent and complete information from the same underling financial information database. Risk of noncompliance is minimized. Cost of compliance is minimized. Effort to comply is minimized.
All the information provided by this resource is released into the public domain. Two key pieces of the resource are a summary of the background information necessary to understand the problem correctly and a conceptual model that pushes the technical aspects into the background, freeing professional accountants from technical details so they can focus on the accounting and reporting.
Next step? Turn the vision into a reality. Stay tuned.
XBRL International has published a candidate recommendation for the XBRL Open Information Model (OIM) 1.0. XBRL International defines OIM as follows:
The Open Information Model provides a syntax-independent model for XBRL data, allowing reliable transformation of XBRL data into other representations.
My personal view here is that this is a good step in the right direction, but there is not really anything that is "XBRL data". XBRL is a technical syntax. There is "financial data" and there is "nonfinancial data" and either of those types of data, or information really, can be represented using the XBRL technical syntax.
What is still missing is a global standard conceptual model for business information, including financial information. Until that global standard model exists, here is the conceptual model that I am using. I arrived at that by reverse-engineering XBRL-based public company financial reports which were submitted to the SEC.
My conceptual model has a significantly deeper level of meaning than is provided by the XBRL International OIM.
Financial InterGroup wrote an An Open Letter to President-elect Donald J. Trump on Financial Reform and a research paper Trumpeting in the New Era of a Lean Technology-Driven Financial System". Seems like the proposal is to create something similar to Dwight D. Eisenhower's Interstate Highway System for the U.S. and global finance system.
I agree with this vision and I believe that Near Zero Defect XBRL-based Financial Reports and Intelligent XBRL-based Digital Financial Reporting can play a major role in turning that vision into reality.
Here are a few excerpts from the open letter and the research paper:
"This is a call to President-elect Trump, an acknowledged master builder, as he ushers in the lean era of financial regulation. We encourage him to establish a new executive-level office to inform his administration on how to rebuild an essential infrastructure component of our economy - the financial system and its regulatory apparatus, on the road to lean, transparent technology driven regulation."
"It's incredulous to many inside the financial industry and truly amazing to those in other industries that after six decades of automation of financial transactions there are no global standards for the identity of financial market participants nor their financial products. Imagine if every supermarket had a different barcode for the same product on its shelves or a different code for the producer or supplier of the product. Walmart, FedEx and Amazon could not exist. Imagine a shopper buying groceries and being asked to return three days later to pick it up. This is the current state of finance, no standards and waiting days to own financial products bought days before."
"The Office of Financial and Regulatory Technology (the OFRT) is to be a new executive branch agency, a research and standards setting body. It would be the center of research and innovation to evaluate new technologies and build links between evolving technologies and new regulations. It would enable more effective and transparent oversight of financial institutions, amongst financial regulators, and between the two in a digitized financial and regulatory environment. It would also enable less regulators and less third-party data and infrastructure intermediaries."
"The OFRT would follow in the footsteps of the U.S. Department of Defense's Advanced Research Projects Agency, the 1960's era government agency responsible for creating a packet switching time-sharing network of computers known as ARPANET, the precursor to today's Internet and World Wide Web. A similar ground breaking technology, distributed ledger technology (DLT) has entered the world of finance. DLT is an outgrowth of the Blockchain. Both were developed to support the digital cryptocurrency Bitcoin. DLT works like a huge, decentralized ledger which records every transaction and stores this information on a global network to prevent tampering. It needs standards and a center of gravity, much like the ARPANET provided for the Internet."
This is a great opportunity for the United States! Here is how to make it work.
Today's software for creating XBRL-based digital financial reports is off target. Software engineers/developers/vendors need to be nudged in the right direction by business professionals. But first, business professionals need to learn what to ask for.
CAD/CAM software which is used to create "digital blueprints" offers good lessons for professional accountants and other business professionals. Contrasting how digital blueprints are created to how digital financial reports can be created helps to communicate the vision of what an intelligent XBRL-based digital financial report is.
I found three videos related to CAD/CAM that run a total of about 25 minutes which helps communicate the vision. Any business professional can understand this information. In those 25 minutes, if you have only a little imagination you can grasp the parallels between what has happened to the blueprint and draftsmen, architects, and engineers; and what is happening to accountants, auditors, and analysts.
When you watch these three videos, think of the following: Near zero defect intelligent XBRL-based digital financial report:
Purpose-build for disclosure management and financial report creation, intelligent XBRL-based digital financial reporting products collect information about financial report creation projects and allow this information to be coordinated across all other representations of the project, so that every statement, policy, and disclosure is based on internally consistent and complete information from the same underling financial information database.
Here are the three videos:
- The Difference between traditional CAD and BIM: (11 minutes) The really good part starts at 3:52 where the narrator explains that you "draw with walls, doors, and windows" rather than with lines and circles like in AutoCAD.
- Revit 2017 - Tutorial for Beginners: (13 minutes) This video simply provides additional, but very good, details which expands the ideas shown in the first video. Shows how Revit lets you work with walls, doors, windows, roofs, ceilings, floors and so forth. Imagine an intelligent financial reporting tool that lets you work with statements, disclosures, policies, roll ups, roll forwards, etc. Think intelligent spreadsheets.
- The Evolution of Drafting: (9 minutes) While the entire video is good to watch, the three graphics which show relating to "no need for interpretation" and "information lost over time" make a major point: Information lost over time: Design phase, Construction phase, Facilities management phase; a similar situation exists with financial reporting
Using the "information loss over time" idea from the third video and combining that idea with the notion of "harmony" as contrast to dissonance from the SWIFT Institute paper, I created the following graphic which shows information loss between standards setters, economic entities which create financial reports using those standards, and then regulators, investors, and analysts who use that information. This is what I came up with:
I don't know that I have the graphic totally right, but I do believe it helps make the point about information loss and how intelligent XBRL-based digital financial reporting helps to minimize information loss by improving communications.
Do you have a better graphic to communicate this notion? Let me know.
What is necessary is a tool purpose-built for creating financial reports? The user is never exposed to the XBRL-technical syntax, or anything "technical" that relates to computers. The "technical" that they work with relate to accounting and financial reporting. How to you create such a tool? Read this. That information helps you hone your skills.
A SWIFT Institute paper, A Critical and Empirical Examination of Currently-Used Financial Data Collection Processes and Standards, provides a framework for analyzing and assessing financial data standards and gives XBRL good marks.
The paper examines common financial data standards in use today: FIX, FpML, ISO 15022/ISO 20022, XBRL, and the US CFTC's Swaps Data Repositories' data. The authors endeavored to develop a framework to assess the quality of a data standard that would work across a variety of standards. Using that framework they evaluate each of these common financial data standards. XBRL received good marks particularly among the semantically complex standards.
The 37 page paper is worth reading. The paper shows a maturing of the way people think about standards. There are three noteworthy items I would like to point out:
Core elements of the model
The core elements of the assessment model are terminology dictionaries, communications standards, reference modeling, and relationship modeling. This points out that things like the US GAAP XBRL Taxonomy are far more than "dictionaries" which is how the typical business professional thinks about such things.
Reasons for and Prevention of Errors
The paper points out specific reasons for errors and how to prevent such errors which impact the quality of information and therefore impact the usefulness of information. The lack of validity checks by software vendors when information is being input tops the list of reasons for errors. Not using validity checks that do exist also made it to the list.
Stakeholder harmony vs dissonance
The paper provides excellent definitions of "harmony" and "dissonance" and explains the relationship between stakeholder harmony and information quality. A specific example will help one understand why this is extremely important. A common obstacle in the creation of a standard is agreeing on concepts and relations between concepts of the standard, the fundamental accounting concept relations is a good example of that. Overcoming disagreements between stakeholders and even within groups of stakeholders is important. Agreement between stakeholder groups and within stakeholder groups contributes to harmony. Lack of agreement contributes to dissonance.
So I refer to "stakeholder harmony vs dissonance" as a "communications problem". Stakeholders need a framework for agreeing. The paper does not explicitly define "stakeholder". I believe that what is meant by the term "stakeholder" is anyone that has a vested interest. Another term for stakeholder is "constituent". A "constituent" is a component part of something. A first step, if not the first step, of arriving at harmony is outlining the perceptions, positions, and risks of each constituency or stakeholder group.
Another important part is providing a conceptual framework for thinking about the system. For example, both US GAAP and IFRS have a conceptual framework for thinking about financial reporting. That includes a set of principles or assumptions or a world view. For example, accounting has a set of principles.
From a financial reporting perspective, this is why the XBRL-based digital financial reporting principles are important and why it is important for accounting professionals to understand knowledge engineering basics. This framework for agreeing which helps the communications process increases harmony and decreases dissonance. This is about bringing the system into balance, creating the appropriate equilibrium. Today, too many of the important moving parts are unconscious to stakeholder groups.
Tools such as the framework for assessing the quality of standards contribute to enabling business domains consciously moving to the appropriate equilibrium. Effectively working standards are important in today's digital age.