Digital Financial Reporting

Financial statements tell a story.  It is a milestone in an accountant's career when the accountant can weave together a logical, cogent, true and fair narrative from information provided and tell a story about an economic entity in the form of a financial statement.  With the ability to perform that task, an accountant has achieved accounting literacy.

That is precisely what an accountant creating an XBRL-based report must do.  But instead of doing this with Microsoft Word, Excel and typing a bunch of stuff into applications that don’t understand accounting; with XBRL-based structured information, accountants need to learn a new approach to telling stories about an economic entity.

Authors Dean Allemang and James Hendler say it well in their book Semantic Web for the Working Ontologist (page 1):

“In the hands of someone with no knowledge, they can produce clumsy, ugly, barely functional output, but in the hands of a skilled craftsmen, they can produce works of utility, beauty, and durability. It is our aim in this book to describe the craft of building Semantic Web systems.”

A brick wall is made of exactly two things: bricks, mortar.

But a brick wall created by a master craftsman, or mason, and a brick wall created by a “weekend warrior” with no knowledge of masonry will be very different. Master craftsmen are created and that process takes time and effort.

The term “mason” can be further broken down in to more detailed distinctions. In the Middle Ages, the terms rough masons, row masons, stone setters, layers and freemasons were used to signify differences in skills. Freemasons who were the most skilled were paid the best .

Masons built our physical world. Knowledge engineers working with subject matter experts will construct our digital world.

Financial reports are rich with associations. Representing that rich set of associations in the form of machine-readable metadata creates the capabilities for software applications that can read and understand those associations to perform what seems like magic.

Information wants to be free from imperfections.  Good tools in the hands of master craftsmen using good methods can produce information that is understandable, useful, durable, and perhaps even beautiful and elegant truly sets information free!

Even smart software applications appear “dumb” if they are not provided the right information. “Dumb” includes information that is wrong, contradictory, inconsistent, disconnected, and is not otherwise synchronized. On the other hand; properly organizing information enables sophisticated software applications to perform to their potential.

This information is provided in the form of machine-readable models and other metadata that help accountants perform their work effectively. How exactly to create those associations and what the associations might look like are up to debate. Regardless of how that debate might turn out; associations are important.

Below is a set of associations from a rather small financial reporting scheme:

David Weinberger points out in his book Everything Is Miscellaneous two very important things: 

• That every classification scheme ever devised inherently reflects the biases of those that constructed the classification system.
• The role metadata plays in allowing you to create your own custom classification system so you can have the view of something that you want. 

Mr. Weinberger continues in his book by pointing out the notion of the three orders of order: 

• First order of order. Putting books on shelves is an example the first order of order.
• Second order of order. Creating a list of books on the shelves you have is an example of second order of order. This can be done on paper or it can be done in a database.
• Third order of order. Adding even more information to information is an example of third order of order. Using the book example, classifying books by genre, best sellers, featured books, bargain books, books which one of your friends has read; basically, there are countless ways to organize something.

Associations and classification are two very important tools of the information age. Those that understand how to use tools and techniques and create this metadata, those who are craftsmen and perhaps the information age equivalent to a freemason will construct our digital world.

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My blog archive has 1,692 posts. My suggestion is that you start here if you are working to understand.  I have tried to summarize everything important from this blog into the document(s) Mastering XBRL-based Digital Financial Reporting.  Eventually, everything will end up there.  The following are additional helpful resources that have not yet been incorporated into those documents:

• Open University
  • Introduction to Bookkeeping and Accounting
• Private Equity
  • New Type of Digital Token
  • Tokenization of Global Debt Markets
  • Data is the Golden Goose
  • LinkedIn Post, Imprecise and Stale Data
  • Inveniam: Building Global Ecosystems On Trusted Data Architecture
  • The Economic Case for Transparency
  • The Economic Case for Transparency in Private Equity
• Fluree Web3 Data Platform
  • Fluree Core Architecture
• TerminusDB
  • What is a Data Product?
  • The Power of the Web Object Query Language
  • Knowledge Graph Database
  • Pivot Table
  • Pivot Table
  • Pivot Table
  • Spreadsheet components
• AnzoGraph Database
• Data Fabric
  • Metadata – The Magic Behind Data Fabric
  • Knowledge Graphs are Key to Data Fabric
  • Modeling for Data Fabric
  • Setting up a big data fabric (video)
  • Data Mesh
  • Knowledge Portal
  • Deploying Data Products
• Jupyter
  • Jupyter Notebooks
  • Project Jupyter
  • Jupyter Kernels
• Logic
  • Logic Gate Visualization
  • JSON Logic Engine
  • JSON Rules Engine
  • PROLOG on Javapoint
• Accounting is being outpased by financial innovation
  • Accounting has been outpaced by financial innovation, LibraTax
  • Accountants and auditors are financial doctors.  We have just given them penicillin.
  • The Future of Accounting (demand, Marysville University)
  • The Future of Accounting (predictions, Marysville University)
  • Accounting Using Tokens (Video)
  • Understtanding Financial Statements (Slides)
  • History of Accounting (Video)
• Triple-entry accounting (bookkeeping)
  • Triple entry accounting (video)
  • Blockchain (the book)
• Token Economics Video Playlist
• Web3
  • Excellent Explanation of Bitcoin (Video)
  • Decentraizing the Semantic Web: Who will Pay to Realize it?
  • Harvard Business Review: What is Web3?
    • "In theory, a blockchain-based web could shatter the monopolies on who controls information, who makes money, and even how networks and corporations work."
    • "This is the vision of the read/write/own web [Web3]."
    • "NFTs can operate on a smaller scale than coins because they create their own ecosystems and require nothing more than a community of people who find value in the project. For example, baseball cards are valuable only to certain collectors, but that group really believes in their value."
    • "We’ve heard all this before, and we’ve seen how earlier episodes of Web3 euphoria fizzled. But that doesn’t mean it should be written off entirely. Maybe it booms, maybe it busts, but we’ll be living with some form of it either way. What version — and how your company responds — could determine the future of the digital economy and what life online looks like for the next internet epoch. For now, that future is still up for grabs."
• Artificial Intelligence
  • A DARPA Perspective of Artificial Intelligence (PDF)
  • A DARPA Perspective of Artificial Intelligence (Video)
  • What is relationship between semantic web and AI?
• Measuring Metadata Quality
• Architecture
  • Think Like an Architect
  • Meta thinking
  • Spotify engineering culture
  • Meta thinking
• Papers
  • Agreed upon procudures on XBRL-based reports
• ACFR Taxonomy (State and Local Governement Financial Reporting)
  • Taxonomy information
  • Info provided by XBRL US
  • HTML Version of Taxonomy
  • Sample report
  • Github
• Australian Accounting Standards
  • Australian Accounting Standards Board
  • AASB 1060 Information
  • Deloitte Info
  • Moore
  • Caseware
  • Grant Thornton
  • PWC
  • AASB 1060 Framework
• Key Auditing Matters (KAMs)
  • AICPA KAMs 
  • LinkedIn Post by XBRL International
  • Critical Audit Matters (CAMs)
  • What are KAMs?
  • Europe Key Audit Matters Database
• Symposium
• Audit framework for financial institutions

IF we humans want machines to help us humans in our information exchange efforts; THEN we humans need to deliver meaningful, purposeful, actionable information to the point of need, at the right time, in an accessible, reusable format, and the entire process needs to be 100% controllable and understandable to the human system operators.

Whether the information exchange is one human exchanging information with another using a software application or one software application API exchanging information with another API; the above paragraph is true.

Fundamentally, accounting is an information exchange technology, in fact accounting was the world's first communications technology. Accounting has evolved before, it is evolving again; going through a great upheaval like many, most, others.

Note that we are talking about the exchange of information, not the exchange of data. Exchanging information is about the receiver being able to take action with that information.  The receiver wants to increase knowledge, insight, and wisdom.

Explainable artificial intelligence (XAI) helps humans automate tasks and processes.  Pacioli is explainable artificial intelligence.  You need Pacioli or something like Pacioli to make XBRL-based digital financial reporting to work.

The use case of financial reporting is such that the creators of reports are permitted to modify the report model of the information being exchanged within specific permitted boundaries. Software must be able to handle this business use case effectively, enabling business professionals to control the process and staying within those permitted boundaries.  Software needs to provide 'bumpers" as some people call it or "guard-rails" as it is called by others.

Auditchain's Pacioli does the above effectively. This fact is provable and can be demonstrated. Pacioli is the result of 20 years of effort.

I don't know exactly what to call Pacioli.  At first I called Pacioli a logic/rules/reasoning engine.  Then I referred to it as a knowledge engine.  Now I am contemplating that Pacioli is an insights engine.  For now, I consider Pacioli a logic/reasoning/rules/knowledge/insights engine in order to be complete I guess.

The rules and information Pacioli works with is declarative, global standard XBRL.  Article 4 of the Business Rules Manifesto states that rules should be declarative rather than procedural. Declarative is more flexible, reusable, and easier to maintain.

Merkle trees and Merkle proofs can be leveraged to make sure the declarative rules have not been tampered with and provide an audit trail.  IPFS provides reliability.  Pacioli leverages both Merkle trees and IPFS.

XBRL processors + XBRL formula processors are defecient when it comes to processing XBRL-based financial reports. Pacioli leverages the open source Arelle XBRL processor and XBRL formula processor; enhancing those capabilities and filling in the gaps between what is provided and what is needed for effective XBRL-based financial reporting.

The Standard Business Report Model (SBRM) of OMG provides a standard logical conceptualization of a business report.  A general purpose financial report is a specialization of a business report (a type of business report).  The Logical Theory Describing Financial Report specifically defines the logic of financial reports and is the basis for SBRM.  SBRM enables the creation of a digital alternative to the general purpose financial report which has been, historically, analog.  The Seattle Method, which is supported by Pacioli, implements the Standard Business Report Model.

But Pacioli, SBRM, XBRL, and the Seattle Method are not an end game; they are a beginning.  The starter set of rules provided for Pacioli are likewise only a beginning.  The XBRL-based global standard rule framework is an approach to implementing customizable but controllable financial reporting schemes.  The same approach can most likely also be used for general business reporting use cases.

There are two approaches to artificial intelligence and, as I have said before, the right approach should be used for the given job.  The two approaches are: 

• Rules-based systems (expert systems, three basic types)
  • Classification or diagnosis type: helps users of the system select from a set of given alternatives.
  • Construction type: helps users of the system assemble something from given primitive components.
  • Simulation type: helps users of the system understand how some model reacts to certain inputs.
• Patterns-based systems (machine learning which can be supervised or unsupervised, five basic type, this video explains the types)
  • Clustering algorithms: categorize or group things
  • Explanatory algorithms: explain the relationships between variables
  • Ensemble learning algorithms: use multiple models
  • Similarity algorithms: compute the similarity of pairs of things
  • Dimensionality reduction algorithms: reduces variables in a dataset

Currently, Pacioli has no machine learning capabilities.  I am no machine learning expert by any measure, but I suspect machine learning is coming at some point.  I do know that to make machine learning work you need training data and that the machine learning is only as good as its training data.

Who will put all these pieces together effectively?  Who will be first?  The answer to that question will revel itself over time.

My personal focus is getting a rules-based expert system built, see here, Expert System for Creating Financial Reports and Logical Schema of Financial Reports.  I know of at least 8 other individuals and groups that have an interest in this at different levels.  Some are focuses at the traction or business event level; others are focused on the complete record-to-report process.  Others are focused on providing an environment within which all this will operating including Auditchain and Twali.

Which path will you choose? Simple but wrong; or Complex but right?

Does all this seem like a mystery to you?  Well, it really is not that mysterious at all if one has been paying attention and has tried to make sense of all this (i.e. employ sensemaking).  I think the risk equation has flipped; it is more risky NOT to be paying attention to all this that it was to get in early and go down the wrong path.

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Pesseract screen shots

This article, What are Trading Pairs in Cryptocurrency?, discusses cryptocurrency trading pairs. USDT-AUDT is a trading pair.

See here.

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Information about AUDT token

Swaps on Metamask.

Bridge from Ethereum to Polygon

Uniswap

Auditchain listed their AUDT token last week.  You can see the market for AUDT in terms of US Dollars using the USDT-AUDT market on Bittrex Global.  Here is the deal though.  Bittrex Global is not usable in the United States in some areas, I believe because of securities laws (but I am not sure). You can get around this by using something like ProtonVPN to change your IP address.

This video, Bittrex Global Tutorial for Beginners, provides a good introduction to using Bittrex Global.

If you want to join the discussion about AUDT, check out this Discord channel.  Or, watch Facebook or Twitter.

Auditchain and the AUDT token may, or may not, succeed. But what is certain is that things are changing, the pace of change will only increase, and Auditchain or something like Auditchain will have a significant impact on accounting, reporting, auditing, and analysis.

You can also track the AUDT-USDT trading pair on TradingView.com

AUDT on BitMart.

Syncfusion has some excellent demos of software interfaces for cloud-based software applications.  You can demo every control.  You can look at and run the code on Stackblitz.

Visirule is an application created using Syncfusion controls.

Pivot table controls. This is a comparison of pivot table controls.