BLOG:  Digital Financial Reporting

This is a blog for information relating to digital financial reporting.  This is my brain storming platform.  This is where I think out loud (i.e. publicly) about digital financial reporting. It is for innovators and early adopters who are ushering in a new era of accounting, reporting, auditing, and analysis in a digital environment.

Much of the information contained in this blog is synthasized, summarized, condensed, better organized and articulated in my book XBRL for Dummies and in the chapters of Intelligent XBRL-based Digital Financial Reporting. If you have any questions, feel free to contact me.

Understanding Digital Financial Reporting using Pesseract

Pesseract is a software application created by a software engineer and myself. We don't consider it a commercial product yet because it does not have the compete set of features completed.  However, Pesseract does have plenty of features and can be effectively used to explore XBRL-based reports and understand where XBRL-based digital financial reporting is headed.

We are not "paving the goat path" like other software developers; our goal is to increase our know-how. We figured out a different path.

Pesseract is a working proof of concept where we are figuring out how to create an expert system for creating high-quality financial reports.  We believe that we can make Pesseract create higher quality reports than the financial reports that are being created today.  Pesseract will be a disruptive innovation that changes how financial reports will be created in the future.  We buy into the notion of the modern finance platform. We buy into the notion of mirror worlds.  We buy into the notion of triple-entry accounting and distributed ledgers.  We believe artificial intelligence can be leveraged to automate many accounting tasks.  We buy into the notion that Lean Six Sigma can be leveraged to improve process quality.

Accounting, reporting, auditing, and analysis in a digital environment is not about making incremental changes to outdated 20th Century paper and document oriented workflow and processes of creating financial reports.

We are making Pesseractavailable for professional accountants to experiment with.  To download Pesseract, go to the Download/Get Started tab here and follow the instructions.  We are not making the creation features available at this point, we are tuning those features.  But, there are many, many other things you can do with Pesseract.  Below is a set of documents that help you learn about Pesseract and XBRL-based digital financial reporting:

  1. Getting Started with Pesseract: helps you learn some of the basics.
  2. Validating an IFRS based Report: helps you understand that Pesseract works with IFRS reports as well as US GAAP based reports.
  3. Report Model Structure and Fundamental Accounting Concept Relations Validation: walks you through the process of validating a reports model structure and fundamental accounting concept relations.
  4. Multiple Languages: walks you through the use of labels in multiple languages.
  5. Appending Instances: shows you basic example of how to append information from one XBRL instance to another XBRL instance.
  6. Dynamic Rules: shows you have business rules can be dynamically used with an XBRL instance. (Here is the example with all the rules available locally, this is really interesting.)
  7. Normalized Comparison: walks you through the process of comparing information across period for an entity or across entities for a period.
  8. Appending Linkbases: shows you basic example of how to append information to an existing report using XBRL linkbases.
  9. Drill Down: shows you how you can leverage the structured nature of XBRL to drill down from higher granularity information to lower levels of granularity; or move from lower granularity to higher granularity.
  10. Filtering and Searching: shows you how you can leverage the structured nature of XBRL to filter and search information within a financial report.
  11. Exploring model structure and fact tables: helps you better understand structured reports by explaining basics of the model structure and fact tables.
  12. Networks, Components, and Blocks: helps you understand the differences between networks, components, and blocks.
  13. Blocks (Advanced): helps you understand the connection between blocks and reporting checklist and disclosure mechanics validation.
  14. Hundreds of Example Reports: helps you understand where to find hundreds of XBRL-based reports which you can help you consolidate your knowledge.
  15. API, Batch Processing, Plugins: helps you recognize that Pesseract is not just a software application; it has an API, you can create batch processes at the command line, and you can create plugins.
  16. Profiles: helps you understand what a profile is, how profiles are helpful.

Stay tuned as additional examples will be provided as they are created and we will provide newer versions of the Pesseract application as as appropriate.  An investment of your time today could make you a digital financial reporting master craftsmen of tomorrow!

Posted on Sunday, October 14, 2018 at 09:01AM by Registered CommenterCharlie in | CommentsPost a Comment | EmailEmail | PrintPrint

Seba Technology Disruption Framework

A BBC News article, Why you have (probably) already bought your last car, reports that RethinkX reckons that within 10 years of self-driving cars getting regulatory approval 95% of passenger miles will be in self-driving electric robo-taxis.  The article goes on to say that these regulatory approvals could be in place by 2021 in the United Kingdom.  Some say this could happen by 2030.

How does disruption work?  The Innovators Dilemma explains the difference between sustaining (or incremental innovation) and disruptive innovation.  Sustaining innovation meets a customer's current needs.  Disruptive innovation meets a customer's future needs.

The Seba Technology Disruption Framework, which was created by Tony Seba, explains how disruption works:

 (Click image to go to presentation which explains Seba Technology Disruption Framework)

Here is the definition of disruption Tony Seba uses:

A disruption is when new products and services create a new market and significantly weaken, transform or destroy existing product categories, markets or industries.

This 50 minute video explainshow AT&T missed the mobile phone market because of a 10x error in estimating the market provided by "an expert". Here is a list of the seven worst technology predictions of all times.

What does this mean for the modern finance platform? What does this mean when accounting, reporting, auditing, and analysis moves to a truly digital environment? Let me know what you think.

Posted on Wednesday, October 10, 2018 at 07:17AM by Registered CommenterCharlie in | CommentsPost a Comment | EmailEmail | PrintPrint

Understanding the Importance of Triple-Entry Accounting

Between 5,000 and 10,000 years ago farmers in Mesopotamia, where agriculture was born, used physical object to count crops and animals . The distinction between types of crops or animals was made by using different types and shapes of objects.

Then, in about 3200 BC, around 5,000 years ago, the first spreadsheet was invented.  These farmers began documenting information using clay tablets in the earliest form of human writing ever discovered called Cuneiform.  They partitioned their clay tablet into rows, columns, and cells.  These farmers used single-entry accounting.

Source: Metropolitan Museum

In 1211 AD a bank in Florence, Italy was the first documented use of double-entry accounting.  Between 1299 AD and 1300 AD double-entry accounting came of age.  In 1494 AD during the Renaissance, Venetian mathematician and Franciscan friar Luca Pacioli  published a book, Summa de arithmetica, geometria. Proportioni et proportionalita (Sum of Arithmetic, Geometry, Proportion and Proportionality).  That book documented the double-entry approach bookkeeping and recommended that others use this approach.  The double-entry approach allowed for better error detection and the ability to differentiate unintended errors from fraud.  Accountants adopted that new approach. 

Most recently there are discussions about immutable mutual digital distributed ledgers using cryptographic technologiesOne technology that can be used to implement a digital distributed ledger is blockchain. People are calling this "triple-entry accounting".  Some say that triple-entry is the most important invention in 500 years.  Basically what triple-entry does is create a link between the two double-entry systems documenting that the transactions in the two systems go together.

There is a little bit of a dispute around the true meaning of "triple-entry". Yuji Ijiri was first credited with using the term but the blockchain folks seem to have perhaps redefined the terma bit. I am using the term "triple-entry" as the blockchain people and Ian Grigg tend to use the term.

Here is the bottom line: 

  • A single-entry is not much more than a glorified list.
  • Double-entry is in essence posting a transaction to two different single-entry ledgers with different parties responsible for each ledger. When you use a double-entry ledger what the transaction represents has to be explained by reasoning, the two transactions logically go together. Removing or changing part of the transaction will make the transaction illogical.  Double-entry allows for the detection of errors and the differentiation of an unintentional error from fraud. 
  • Triple-entry further builds on double-entry in that triple-entry links a transaction in two double-entry ledgers and the link is publicly available for all to see the transaction.  You are still able to explain the reasoning behind the entry but additionally the transaction is visable for all to see which makes it very tough to lie since others are watching.  It would be illogical for the transaction to not be reflected the same in both ledgers.

With the volume of transactions growing and complexity increasing; triple-entry accounting intuitively seems like a potentially valuable tool. Perhaps those experimenting with triple-entry accounting might come up with something useful.

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Toward Blockchain-Based Accounting and Assurance

Posted on Monday, October 8, 2018 at 03:52PM by Registered CommenterCharlie in | CommentsPost a Comment | EmailEmail | PrintPrint

Introducing the Fact Ledger

Before writing was invented, between about 5,000 and 10,000 years ago farmers in Mesopotamia used physical object to count crops and animals.  In about 3200 BC the first spreadsheet was invented when these farmers began documenting information using clay tablets in Cuneiform; partitioned their clay tablet into rows, columns, and cells.  This was single-entry accounting.

In 1211 AD a bank in Florence, Italy was the first documented use of double-entry accounting.  Between 1299 AD and 1300 AD double-entry accounting came of age and in 1494 AD during the Renaissance, Venetian mathematician and Franciscan friar Luca Pacioli published a book, Summa de arithmetica, geometria. Proportioni et proportionalita documenting this approach.

Accountants have a special name for the spreadsheets, or tables, that these farmers invented and Italian bankers perfected. Accountants call these ledgers

A ledger is simply a place where you record information such as transactions.

A fact ledger is a new type of ledger that offers utility and leverage when accounting, reporting, auditing, and analysis is done in a digital environment.  Another accountant and I came up with this idea when trying to figure out how to actually implement accounting process automation.  The document Introducing the Fact Ledger summarizes our ideas related to this tool.

Fact ledgers can work with single-entry accounting, double-entry accounting, or even triple-entry accounting.

Do you have any ideas that might improve on our vision of the fact ledger?  If so, give us a shout.

Posted on Monday, October 8, 2018 at 09:28AM by Registered CommenterCharlie in | CommentsPost a Comment | EmailEmail | PrintPrint

Reengineering Accounting

There are a lot of blockchain-related companies and other underlying infrastructure providers that are trying to reengineer accounting.  Here is a partial list:

It will be interesting to see if any succeed. Here are some good videos that explain Bitcoin, Blockchain, and Triple-Entry accounting: Bitcoin is more than money. Blockchain is a new way to record and store transactions of all sorts. This video explains the basics of how bitcoin works. This video explains how triple-entry accounting works.  This is a pretty decent video that explains the implications of triple-entry accounting.  This is an OK explanation of triple-entry accounting.

This paper created by the UK government is one of the most comprehensive yet approachable resources for understanding distributed ledgers.

Integrating semantics and blockchain.

 

AICPA: Evolution of Auditing: From the Traditional Approach to the Future Audit

Conclusion

Auditing has made great strides in the past decade, but it has not seemingly kept pace with the real-time economy. Some auditing approaches and techniques that were valuable in the past now appear outdated. Also, the auditing evolution has reached a critical juncture whereby auditors may either lead in promoting and adopting the future audit or continue to adhere to the more traditional paradigm in some manner. Future audit approaches would likely require auditors, regulators, and standards setters to make significant adjustments. Such adjustments might include (1) changes in the timing and frequency of the audit, (2) increased education in technology and analytic methods, (3) adoption of full population examination instead of sampling, (4) re-examination of concepts such as materiality and independence, and (5) mandating the provisioning of the audit data standard. Auditors would need to possess substantial technical and analytical skills that are currently not components of most traditional four year university accounting programs.

SOX introduced the first major change in the mandate of the public company audit. This new prescription focuses on auditor assessment of internal controls, a very important step in the assurance of future systems that will be modular, computerized, and often outsourced. The accounting profession now faces an opportunity to further elevate the audit to a higher level of automation. It is imperative that accountants ultimately lead the way in adoption and implementation of the future audit such that they continue to be the professionals of choice relative to audit engagements of the future.

 

Feasibility, Desirability, Viability

  • Desirability is explored through Customer Segments, Customer Relationships, Channels and Value Proposition.
  • Feasibility is explored through Key Resources, Key Activities and Key Partners.
  • Viability is explored through Cost Structure and Revenue Streams.

Business Model Environment

Generally speaking, every major brand collapse you can think of started with the abandonment of their competitive advantage.

  • Kodak invented digital cameras, then neglected the technology.
  • Department stores thrived on convenience, but their disdain for internet shopping made their services harder to engage with.
  • Nokia and Motorola had the phone market sewn up, then sat on their hands while two others took their Innovative title away from them.

Multidimensional Accounting Information 

Posted on Friday, October 5, 2018 at 07:34AM by Registered CommenterCharlie in | CommentsPost a Comment | EmailEmail | PrintPrint