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.

ESMA Explains Anchoring and 2020 ESEF Implementation Requirement

The ESMA created a nice little video, ESEF 2020: Implementation support for preparers, that provides information related to creation of the Inline XBRL documents to be required in 2020.  Included in this video is a good explanation of "anchoring".

Also provided is a tutorial for creating these reports.

Posted on Friday, March 1, 2019 at 06:45AM by Registered CommenterCharlie in | CommentsPost a Comment | EmailEmail | PrintPrint

More Thoughts on Deloitte's Notion of The Finance Factory

In a prior blog post I mentioned Deloitte's Notion of The Finance Factory.  I studied Deloitte's vision and put my summary in this document, Exploring the Notion of The Finance Factory.

I found another document that Deloitte has published called Finance 2025 where they make 8 predictions.  Here is a summary of the predictions Deloitte is making with my commentary:

1. The finance factory

Transactions will be touchless as
automation and blockchain reach
deeper into finance operations.

[CSH: So this notion of "the finance factory" is a way Deloitte "packages" what others call automation of accounting, reporting, auditing, and analysis tasks.]

[CSH: Deloitte erroneously uses the term "blockchain" when they really should be using "digital distributed ledger".  There are lots of technologies which can be used to implement digital distributed ledgers, one is blockchain.  Another is hashgraph, another is a hyperledger, another is semantic blockchain, etc.]

2. The role of Finance

With operations largely
automated, Finance will double
down on business insights and
service. Success is not assured.
The skills required by finance
professionals will change, likely
dramatically, as new combinations
of technology and human
workforces permeate the
workplace
.

[CSH: I completely agree that for like 70% of financial professionals, the skills they need will change. The best example of this is how humans partner with calculators such that the humans can do math faster and more accurately.]

3. Finance cycles

Finance goes real time. Periodic
reporting will no longer drive
operations and decisions-if it
ever did.

[CSH: So, current financial reporting processes tend to be "batch" type work processes.  You have monthly batches, quarterly batches, and yearly batches.  Like manufacturing which tries to get the batch size down to ONE (i.e. every batch is unique), accounting departments will do the same because of automation of many tasks.]

4. Self-service

Self-service will become the norm.
Finance will be uneasy about this.

[CSH: Seems like what they are saying is that because finance cycles are "real time" and things are automated, if you want information you just "click" and then get the information you need when you need it.]

5. Operating models

New service-delivery models
will emerge as robots and
algorithms join a more diverse
finance workforce-think about
the integration of freelancers, gig
workers, and crowds. Companies
will assess the benefits of
automation against onshore and
offshore operations.

[CSH: Basically, there is lots of competition/options as to how work can get done.]

6. Enterprise resource planning

Finance applications and
microservices challenge traditional
ERP. Big vendors will be prepared.

[CSH: So what they seem to be saying is that you can cobble together a bunch of subsystems together to get the sort of functionality you get from SAP and other ERP systems.]


7. Data

The proliferation of APIs will drive
data standardization, but it won't
be enough. Companies will still be
struggling to clean up their data
messes.

[CSH:  People tend to use the term "data" too much, and the term "information" too little.  There is a big difference between "data" and "information".  Most accountants barely understand "data", they really don't comprehend the very significant difference between "data" and "information".  Information is what will make all this automation magic happen.]

8. Workforce and workplace

Employees will be doing new
things in new ways, some of which
will make CFOs uncomfortable.

[CSH:  "Doing new things in new ways" is really hard to believe or understand if you don't understand the difference between "data" and "information".]

BOTTOM LINE:

So the bottom line is this.  If you read Computer Empathy, you can understand that a lot of the things Deloitte is talking about are very, very possible.  Deloitte's vision is probably the best articulated vision that I have run across.  Deloitte's articulation of their vision has helped me to tune my vision.

Clearly giant consulting firms like Deloitte want to sell you stuff.  I don't think Deloitte actually understands how to achieve a lot of this stuff at this point.  People are still experimenting.  I know that I have spent literally thousands of hours trying to figure all this stuff out.  These changes will not happen over night.  Many of these sorts of changes will happen.  Overstating the possibilities is not helpful.  Ignoring change or understanding the possibilities of change is also not helpful.

What I am going to do is take Deolitte's articulation of a vision and combine it with my vision and see what I come up with.

Posted on Tuesday, February 26, 2019 at 01:35PM by Registered CommenterCharlie in | CommentsPost a Comment | EmailEmail | PrintPrint

Deloitte's Vision: The Finance Factory

Deloitte is articulating a vision of what they call "The Finance Factory".  I buy into that vision.  Here is how Deloitte describes the Finance Factory:

The finance factory handles core finance processes, and connects to finance centres of excellence and outsourcing partners in a hub-and-spoke model.

There’s no paper, anywhere. Employees use cloud-based apps on mobile devices to transact their business, and highly standardized, simplified, workflow-enabled business processes handle the rest. Automated controls and intelligent process monitoring and analytics keep watch over core, extended and outsourced process performance, exceptions and service levels to help minimize rework. Finance managers receive event-driven, real-time updates thanks to new integration tools and advances in in-memory processing.

The close process is continuous, if not yet real-time. A daily soft close is the new norm, made possible by visual close management tools, integrated sub-ledgers, daily time capture, journal workflows, reconciliation tools, as well as automation of consolidation, foreign exchange, allocation and intercompany transfers. Finance teams now simulate pre-close results and can support the continuous development of the MD&A throughout the close process.

The description of the vision is maturing.  Last year I heard the term "lights-out finance" explained in broad brush strokes.  Now, I would point you to these Deloitte documents that help paint the details of the vision:

Others provide insights into the possibilities but refer to the same thing using different terms.  "Financial Transformation" and "Finance Digital Transformation" and "The Modern Finance Platform" and "Digital Finance" and "Mirror World" are some of the different terms used:

Also, consider that the end or OUTPUT of The Finance Factory is INPUT into some other system for, say, the analysis of financial information or RegTech systems used by regulators or lendors.  For example, creating a discounted cash flow model using the information from a financial report is a step after information leaves The Finance Factory.

So, the vision is great.  But how do you actually get this vision implemented?  Well, of course, the giant consulting firms like Deloitte would tell you to hire them.  But even if you hired Deloitte or someone else and paid them a bunch of money, how would they actually implement all that "stuff"?  Here are the specific pieces that I came up with:

I would not encourage people to "role your own" solution.  My personal view is that the best approach is to purchase off-the-shelf software where you can.  Now, very little software exists currently.  That will change.  I would encourage you to ask software vendors if they use global standards or if they use proprietary formats and approaches.  Avoid proprietary formats and approaches, go with global standard approaches and formats supported by software vendors.  That way, if you are not satisfied with one software vendor you can easily switch.  If you cannot find the software you need, then wait.  This transformation will take years and years.

Posted on Wednesday, February 20, 2019 at 04:23PM by Registered CommenterCharlie in | CommentsPost a Comment | EmailEmail | PrintPrint

Essence of a General Purpose Financial Report

A general purpose financial report is a high-fidelity, high-resolution, high-quality information exchange mechanism. The report is a compendium of complex logical information required by statutory requirements and regulatory rules plus whatever management of an economic entity wants to voluntarily disclose.  The report represents quantitative and qualitative information about the financial condition and financial performance of an economic entity.  There are a number of different financial reporting schemes: US GAAP, IFRS, IPSAS, GAS, FAS, etc.

Financial reports are not uniform.  Financial reports are not forms, they have variability.  This consciously allowed variability is an essential, characteristic trait of robust reporting schemes such as US GAAP, IFRS, and others.  This allowed variability contributes to the richness, high-fidelity, and high-resolution of reported financial information that is unique to an industry sector, a style of reporting, or an economic entity. This variability is a feature of such reporting schemes.  Different reporting styles, different subtotals used to aggregate details, and using some specific approach given a set of allowed alternatives are examples of variability. Variability does not mean "arbitrary" or "random". There are known identifiable patterns.

Rules are used to articulate allowed variability and "channel" creators of reports in the right direction and therefore control variability, keeping the variability within standard limits.  That keeps quality where it needs to be.  Rules enable things like preventing a user from using a concept meant to represent one thing from unintentionally being used to represent something different. Further, the discipline of describing something in a form a computer algorithm can understand also assists you in understanding the world better; weeding out flaws in your understanding, myths, and misconceptions about accounting and reporting standards.

Use case:

Two economic entities, A and B, each have information about their financial position and financial performance. They must communicate their information to an investor who is making investment decisions which will make use of the combined information so as to draw some conclusions. All three parties (economic entity A, economic entity B, investor) are using a common set of basic logical principles (facts, statements, deductive reasoning, inductive reasoning, etc.), common financial reporting standard concepts and relations (i.e. US GAAP, IFRS, IPSAS, etc.), and a common world view so they should be able to communicate this information fully, so that any inferences which, say, the investor draws from economic entity A's information should also be derivable by economic entity A itself using basic logical principles, common financial reporting standards (concepts and relations), and common world view; and vice versa; and similarly for the investor and economic entity B.

Principles:

  1. A general purpose financial report is a high-fidelity, high-resolution, high-quality information exchange mechanism.
  2. Prudence dictates that using information from a financial report should not be a guessing game.
  3. All formats conveying information should convey the exact same meaning be that format paper, e-paper, or some machine readable format. 
  4. Explicitly stated information from information bearers or reliably derived information is preferable to requiring information receivers to make assumptions.
  5. Double entry accounting enables processes that allow for the detection of information errors and to distinguish errors  (unintentional) from fraud (intentional).  
  6. Catastrophic logical failures are to be avoided at all cost as they cause systems to completely fail.

General Purpose Financial Report:

 

(Click image for larger view)

A logical theory defines and describes things.  All of this can be described logically in a manner that is easy for a professional accountant to understand.  For example, consider the Logical Description of a Business Report.

Logic a set of principles that form a framework for correct reasoning. Logic is a process of deducing information correctly.  Logic is about the correct methods that can be used to prove a statement is true or false.  Logic tells us exactly what is meant.  Logic allows systems to be proven.

The principles of logic are topic-neutral, universal principles which are more general than say the single domain of biology, mathematics, accounting, economics, or other domain. Logic has to do with the meaning of concepts common to all domains and establishes general rules governing concepts.

Logic is the process of deducing information correctly; logic is not about deducing correct information. Understanding the distinction between correct logic and correct information is important because it is important to follow the consequences of an incorrect assumption. Ideally, we want both our logic to be correct and the facts we are applying the logic to, to be correct.  But the point here is that correct logic and correct information are two different things.  If our logic is correct, then anything we deduce from such information will also be correct.

Logic is also not the psychology of reasoning.  Again, logic tells us how we ought to reason if we want to reason correctly.  Whether people follow these rules is not our concern here.  The psychology of reasoning helps one understand the actual reasoning habits of people including reasoning mistakes. Again, our concern is getting the logic correct.

From the set of allowed laws and regulations, professional accountants can exercise their judgement as to which allowed alternatives from that set best conveys information.

Details about financial reports must be explained to brainless robots.  Once you define things you can ask questions.

The discipline of describing something in a form a computer algorithm can understand also assists you in understanding the world better; weeding out flaws in your understanding, myths and misconceptions.

Posted on Monday, February 18, 2019 at 12:19PM by Registered CommenterCharlie in | CommentsPost a Comment | EmailEmail | PrintPrint

Preparing Professional Accountants for the Next 25 Years

Many business professionals really have no clue about what is about to be thrust upon them over the next 25 years.  Business professionals really have no choice what-so-ever as to whether this change will occur or not.  The change is already occurring.  Business professionals, including professional accountants, can choose whether they deal with this change prospectively or retrospectively.

There is no universal "right" or "wrong" answer to the question as to the best approach to take, proactive or reactive.  But, the choice you make will have consequences.

When I graduated from college in 1982 and showed up that fall in the offices of Price Waterhouse, one of the managers pointed to a room that had two IBM Personal Computers and said something like, "Why don't you see if you can make those do something."

Most of the other 50 or so accountants paid no attention to those new computers.  Me, I took a class in VisiCalc which was the first electronic spreadsheet made for personal computers.  Some years later I learned Lotus 1-2-3, then Excel.  At one point I took a five day class at Microsoft that had to do with macros and Visual Basic for Applications (VBA).

Others.  Well, many other accountants adopted the strategy of avoidance.  There were accountants that figured that they could retire in five to ten years so they were just going to ignore the whole computer thing.

Today, many accountants seem to be adopting a similar approach of retiring or simply denying that anything will change.  Trust me when I say that while that might work for some older accountants, it is really a dumb strategy for those who are younger.

Another thing is that does not work very well is listening what what the majority of the profession is saying and doing that.  The problem with that is that the majority of the profession really has no idea what is coming because they don't have the proper background to understand.

First, what is going to change?  In my opinion based on what I have seen and experienced over the past 20 years the following is going to happen:

  1. Specialized artificial intelligence: Computers will become even more adept at doing useful work for professional accountants, other business professionals, and in general.  The primary new capability that will enable this is "specialized artificial intelligence".  What I mean by that is a software program augmenting the skills of an accountant, similar to how a calculator augments your skills for doing math.
  2. Structured information: More structured, semantic-oriented information will be used.  This is as contrast to "text search" and computers figuring things out from unstructured information.  What I am talking about is professionals representing information in machine-readable structured form and then computers working with that rich, structured information. XBRL-based general purpose financial reports are a good example of structured information. Artificial intelligence software (i.e. #1) can do much more with structured information.
  3. Digital distributed ledgers: Whether it is blockchain based or hashgraph based or one of the many other digital distributed ledger formats available; digital distributed ledgers will have a big impact.  The primary thing that digital distributed ledgers do is turn proprietary, local databases into standard, public databases and make sharing information easier.  Digital distributed ledgers is a method of making more structured information available (#2) which means that you will have more information that AI applications (#1) can work with.
  4. Automation of accounting, reporting, auditing, and analysis processes: Enabled by #1, #2, and #3 above; financial transformation and moving to a more modern finance platform is a no brainer.  For example, XBRL-based general purpose financial reports.

So, what should you learn to make sure that you have the skills you need to survive and thrive over the next 25 or so years?  What do you need to understand in order to best grasp the opportunities that will appear in the coming years? This is my view:

  • Logic: The single most helpful thing that I did was to take a college class in formal logic.  Now, I would admit that an entire course in formal logic is probably overkill.  But unfortunately, it is harder to find a college professor that is teaching only the portions of formal logic that you need.  What you need, in my view, is to formalize your understanding of logic a bit rather than just rely on your natural, innate understanding of logic that most people have.  Logic helps you understand how computers "think" and helps you understand what they can and cannot do and how to get them to do the things they can do.  I summarized a lot of this information in the document Computer Empathy.
  • Information Science:  This hard to define precisely.  First off, you don't need to learn a bunch of "technical" stuff.  What you need to learn is fundamentals of what information is (as contrast to data), what it takes to get computers to do useful work for you, and other things like that.  Again, i tried to articulate as best as I could what I believe you need to learn in the document Computer Empathy.
  • Business Analytics: Excel is an excellent tool...except when it is not. One good definition of business analytics is “the study of data through statistical and operations analysis, the formation of predictive models, application of optimization techniques, and the communication of these results to customers, business partners, and business executives.” There are lots of good business analytics tools.  But, what you really need is the understanding of statistics, interpretation of information, analysis methodology, etc.

In my personal view, somewhere between 30% and 70% of accounting jobs will change.  That means that somewhere between 30% and 70% of professional accountants can do nothing different and still do just fine.  Some studies say that 98% of accounting jobs will simply go away.  That just will not happen.

And so some professional accountants are definitely at risk.  Others will completely miss the opportunities that reveal themselves because they were not prepared.  Be very careful who you listen to, they might be pointing you in the wrong direction.  And don't just take my word for any of this, I don't have a perfect crystal ball, I simply have some of the skills necessary and a track record to make a decent prediction.

Posted on Monday, February 18, 2019 at 09:31AM by Registered CommenterCharlie in | CommentsPost a Comment | EmailEmail | PrintPrint