Digital Financial Reporting

In this video, Finance in a Digital World and the Impact on CFOs, John Steel who leads the finance transformation practice of Deloitte makes the statement,

"Five years from now there is either no CFO or the CFO is playing a different role."

John's view is consistent with what the AICPA and Journal of Accountancy are saying which is that technology is poised to change the accounting profession.

In the video, John goes on to say, "Digital is having a tremendous impact and it's quite disruptive."  In the video he goes over trends that are occurring.  One of those trends is process robotics.  John uses the term "lights out finance" meaning a finance that is completely automated.  Now, we may never get to where the lights are completely out, but digital will involve automation of many existing manual processes.

First, if you don't understand what digital means, please read this document: Getting Ready for the Digital Age of Accounting, Reporting, and Auditing: a Guide for Professional Accountants.  That document will help you dial in your perspective.

A key word here is "disruptive".  As pointed out by The Innovators Dilemma, there are two types of innovation: sustaining and disruptive.  Sustaining innovation meets customer's current needs, making incremental improvements in quality and efficiency of current processes. Disruptive innovation is about meeting future needs of customers.

Process robotics is about automating accounting, clerical, administrative, and other such tasks using software robots.  Artificial intelligence technology drives these software robots.  It really is a lot like how physical robots were employed to replace humans in manufacturing processes such as the process of building cars.  Software robots cannot automate all tasks.

And this is not about robots taking over the world.  The way it will work is that you will have humans augmented by machine capabilities, much like an electronic calculator enabling a human to do math quicker, will empower professional accountants and others who know how to leverage those machines.

Much like how CAD/CAM and BIM automated the process of creating blue prints and other tasks involved in the design, engineering, and construction of things; process robotics driven by artificial intelligence will automate processes such as the process of creating financial reports.

I know this can be hard to believe, but go watch that short video about The Innovators Dilemma to understand how this will all unfold.

Any significant change is hard. However, success is the most likely outcome for XBRL-based digital financial reporting.  While change does require effort, the majority of people committed to change do tend to succeed.

Certified Public Accountants should be active participants in the process of creating digital financial reporting, not passive bystanders.

But to participate, you need to get the proper background information.  If you don't, then there is a very high probability that you might not understand the change.

One big area of confusion relates to how XBRL-based financial reports will be audited.  Here is a summary of my thoughts related to auditing the meaning being conveyed by XBRL-based digital financial reports.  Make no mistake: ultimately, XBRL-based information will be audited.

I updated the documents Digitizing Financial Reports and Overview of Professional Accountant's Interests, Perspective, Position, and Risks.  The document can be very helpful in getting professional accountants to understand why they should be participating in and shaping the change to digital.  The documents help professional accountants understand and think about important issues related to going digital.

I created a video, How XBRL Works, which seems to be pretty popular for people who want to understand how XBRL works.  (The video has over 50,000 views; about 463 views per month.)

But while I explain how it works, you don't actually get your hands dirty and use XBRL, seeing for yourself how it actually works.

Well, here is something else that helps you understand how XBRL works using Excel.  The link is to a ZIP archive which contains an Excel spreadsheet.  The spreadsheet has some very straight forward macros.  What the macros do is extract information from the XBRL-based 10-Ks of 464 public companies that use interest-based revenues to report their financial information (i.e. banks).

To run the VBA code in the spreadsheet, all you need to do is click the one button in the upper left hand corner of the spreadsheet.  You do need to have Microsoft Internet Explorer installed on your computer, the VBA code uses the Microsoft XML parser to extract information from the XBRL-based reports.

There is a great deal one can learn from reverse-engineering the VBA code.  Also, if you notice the results of the information extracted and you ask yourself, "Why do some financial reports contain errors and others do not contain errors," you can learn even more.

If you are a CPA that understands how to write Excel VBA and you want to learn more about XBRL contact me.  I am always looking for people to collaborate with to create interesting software. Experimentation is a great way to get ready for the digital age of accounting, reporting, and auditing.

I have updated my description of the high-level conceptual model of an XBRL-based digital financial report.  You can get this updated information here, Introduction to Conceptual Model of a Digital Financial Report.

Why should you care about understanding this high-level conceptual model?  Anyone can create something that is complicated.  It takes hard work to create something that is simple.  The conceptual model makes things simpler.

If this higher-level conceptual model is implemented in software applications, it makes it possible to make software far more approachable by business professionals.  Not using some high-level conceptual model leads to hard to use software, less functional software, and less elegant software.

You don't have to use my conceptual model: if you don't like mine, create your own.

Ready for more detail?  Read PART 2 of Intelligent XBRL-based Digital Financial Reporting.  Really want to start getting your hands dirty? Here is the next layer of the conceptual model.

Why should you even care?  Because accounting, reporting, and auditing are going digital.

Current information published by the AICPA and Journal of Accountancy tell professional accountants to "be ready" because "technology is poised to transform the accounting profession" and that "the professional will emerge in a different form".  But there is little information provided as to exactly how to be ready.  What additional skills do professional accountants need to remain relevant?

In the document, Getting Ready for the Digital Age of Accounting, Reporting and Auditing: a Guide for Professional Accountants, I endeavor to provide that information.

While the resources referenced at the end of the document are not perfect; they are the best resources that exist that I have personally seen.  If you are aware of something better, please let me know.  Really.  I want to know.

The information I have put together, while not perfect, is the best summary, synthesis, organization, instantiation that I have come up with to date.  While the referenced resources contain redundant information (because I have not figured out the best organization of the pieces yet); the information set is complete.

If you want to be on one of the early boats to digital financial reporting, that information will help you understand what you have to learn and why you have to learn it.