Digital Financial Reporting

WappWolf is one of the most creative things I have seen in a long time. This videobriefly explains what WappWolf does. Basically, what WappWolf does is provide "stuff" which allows you to put together a workflow.  I tried WappWolf by within a few seconds uploading a file from my computer to my FTP site.  Very straight forward and easy.

I have mentioned Yahoo Pipes before. And I have mentioned M2M before.  This company has an M2M platform.

Imagine a business reporting platform which wires all this type of stuff together.  Business users will not generally get what I am talking about, and there is no need for them to get it.  Some cleaver software vendor will eventually get it, build it, and when business users see this they will use it.

Don't be fooled because all you see is rotating images, uploading files, extract PDF text.  Use a little imagination!

This HL7 presentation talks about what you need for interoperability to be achieved: technical interoperability, semantic interoperability, and process interoperability.  Process = workflow.

Don't think in terms of technical process/workflow.  Imagine business workflow components and/or accounting system workflow components.

Stay tuned if you don't see what I am talking about.  I will dig into this more later.

Simon Sinek gave a great presentation at TED: How great leaders inspire action. In the presentation he points out that great innovators think the opposite from everyone else. I recommend this 18 minute video to anyone who is working to make digital financial reporting a reality.

SEC XBRL financial filings are representations, not presentations, of the information they contain. Many accountants see these filings as presentations.  They look at the XBRL as simply the Word document or HTML version of the report with the different pieces of the report "tagged" with XBRL. In fact I have seen training material which shows exactly this, usually written by accountants who likewise don't really grasp XBRL.

And I guess I should not be surprised by this view of XBRL because there is even software which works in this manner, "tagging the presentation" in order to fit the completed Word or HTML presentation into XBRL.

This presentation orientation is not appropriate.  SEC XBRL financial filings do have a presentation relations perspective.  But they also has a calculations relations perspective and what is called a definitions relations perspective. Now, don't confuse the linkbases or XBRL technical syntax with the meaning or semantics and don't confuse the explicit semantics of XBRL Dimensions and the implicit semantics when XBRL Dimensions is not used. These are complex conversations and I don't want to get into a deep discussion about that; I do want to make two points.

The first point is that there are three different relations, not one.  That alone provides enough evidence to show that XBRL is not a presentation.  Sure, presentation is part of the representation but it is only part and in XBRL it is a very weak part of the representation.  For a long time I have pointed out that the XBRL calculations are impotent because they cannot be used to express all the computations within an SEC XBRL financial filing. The presentation relations are even more impotent, when it comes to expressing a presentation a user would expect for an SEC XBRL financial filing.

The second point is the use of the term "tag".  There are a lot of reasons using the term "tag" is a bad idea.  First off, the term "tag" is at best a syntax term many people associate with XML.  XBRL really has no "tag" from the syntax perspective and it certainly does not have tags from the semantics perspective.  But let's pretend I am wrong and say that tags do exist (even though they don't).  What does the tag represent?  A network? A [Table]? An [Axis]? A [Member], [Line Items], a concept, an abstract concept, the reported fact itself, an attribute of the fact such as the units or number of decimals?  Hopefully you see my point. The term "tag" is too general  even if the term did exist. Fact is, you could stretch things and say that a tag exists from the XBRL technical syntax perspective, but from a semantics or meaning perspective the term means nothing.

An SEC XBRL financial filing is a representation, or model, that a computer can understand.  It is true that the XBRL technical syntax "delivers" or "exposes" the information to a computer, but it is the semantics or meaning which the computer is trying to understand.

There are two "layers" of meaning or semantics, it seems to me, when it comes to an SEC XBRL financial filing.  The first layer is the business reporting layer which uses things such as networks, [Table]s and [Axis] to break up the components of a filing into discrete pieces of the model or representation.  The second layer is the financial reporting semantics of the filings: does the balance sheet contain assets, does the balance sheet contain liabilities and equity, does assets equal liabilities and equity, does assets foot, does liabilities foot, and on and on; all those semantics which accountants know exist within a financial report.

Your representation, your model needs to work.  Your model may be different that some other SEC filers model because, say, you are a bank and they are an airline.  This is not a problem for XBRL to express in fact that is a core strength of XBRL, its flexibility to do just that.  But again, each of those models need to work, for the bank and for the airline, and the core semantics of both models should agree where they should agree.

Does a bank have assets?  Sure.  Does an airline have assets? You bet.  Does assets = liabilities and equity? Does assets foot?

That is what your representation, your model, of your SEC XBRL financial filing is all about.

The transition/changes XBRL is enabling is explained by the book The Innovator's Dilemma, by Clayton Christensen, I believe. Entrenched established companies and attacking entrant companies would both gain from reading this book.

Why? The Wall Street Journal reports that Kodak is filing for bankruptcy.  Borders has filed for bankruptcy. Newspapersare dying off. iTunes and the iPod have changed the music industry.

This same type of disruption is occurring in the domain of financial reporting. If you are involved in financial reporting in any way you may believe you are exempt and that the changes will not impact you. But read the book, it just might change your view.

The global consultancy firm Gartner classifies XBRL as a transformational technology.  Gartner defines transformational as something that "enables new ways of doing business across industries that will result in major shifts in industry dynamics."

The Innovators Dilemma classified technologies into two buckets:

• Sustaining technologies which foster improved product performance
• Disruptive technologies which result in worse product performance in the short term, but then over the long term they bring to a market a very different value proposition than had been available previously

What Gartner says about "enables new ways of doing business" and what Chritensen calls "a very different value proposition" seem to be the same characteristic to me.

No one really knows exactly how all this change will pan out, who the winners will be, who the losers will be, what innovations entrants into the market will come up with, or the other dynamics which will push on the domain of financial reporting. You could make some good guesses.  Financial printers seem to be in a rather precarious position, that is rather clear. How accountants will be affected is less clear. Accounting software vendors, also harder to say.  Financial reporting workflow and processes in general, there are many clues emerging from the US SEC's bold experiment with XBRL.

Don't be fooled into believing that digital financial reporting will not take off in other areas of financial reporting, beyond public company reporting to the US SEC. There are many, many other existing innitiatives by regulators around the globe.  I have heard a figure from XBRL International that 70% of the capital markets report using XBRL.  I have also heard that there is work going on toward creating a not for profit reporting taxonomy and a state and local government reporting taxonomy in the US.

Who would have ever predicted that Kodak would have to file for bankruptcy? The evidence seems to be very strong that digital financial reporting may just become a reality.

How do you think things might change for financial reporting?

Not sure how I missed this, but I was just made aware of this MIT project.  The blog post describes the MIT prototype as:

Rong is working on a software prototype for translating financial reports from the XBRL format into the OWL language, the idea being to preserve and enhance the implicit semantics in XBRL and enable the logic model of financial reports, according to a soon-to-be-published paper co-authored by Rong.

Personally, I am skeptical but certainly open to being proven wrong.  Why am I skeptical?  Well, read this blog post and be sure to read the PDF pointed to on this post.

The bottom line is this: it is impossible to take something which has not modeled correctly from a semantic perspective, convert the syntax, and magically have the proper semantics.  Now, if the semantics of the SEC XBRL financial filings were correct you could convert all that information into whatever syntax you want including OWL/RDF.

Further, while AI (artificial intelligence) might be helpful in de-tanging the semantic mess of SEC XBRL financial filings, if the semantics are correct, why would you need AI to make the information useful?

Now, I admit that I could be totally missing the point here.  I do agree that someone will be able to use all that SEC XBRL information to compete with Bloomberg, Thomson Reuters, CompuStat, Hoovers and all those other data aggregators who are manually collecting information.  So sure, someone may make money converting the current manual process into some sophisticated process which uses AI and other technologies to over come the poorly modeled SEC XBRL financial filings.  Then, some different company can make money selling the data to others.

But I see two problems with that: (a) is that what the SEC meant when they said investors can more easily use the information?  (b) similar types of processes need to be created for each implementation of XBRL?

Seems to me that the best thing to do is to not fight the symptoms of the problem but rather to fix the problem.  Model the information more appropriately and THEN use all that nifty RDF/OWL and AI stuff to expand what you can do with the well modeled information.

What do you think?

I am currious to see what the folks at MIT come up with. And frankly, I do hope that they prove me wrong.