Digital Financial Reporting

The European Commission has issued a communication relating to the preparation and audit of financial statements created using the ESEF (European Single Electronic Format, which is XBRL).  Here is that communication in English formatted in HTML.  The last paragraph in section 2.1 states: (emphasis is mine)

To ensure the integrity of the internal market and a homogeneous level of protection for all users of financial statements and annual financial reports, users should be granted the same level of protection irrespective of how they access the information contained in the financial statements, be it for instance via scanned-paper documents or via electronically structured documents.

Need a tool to make sure your XBRL properly conveys what you desired to convey and that the financial report is a properly functioning system?  See this concept paper about Pacioli. See this prototype of what that audit tool might look like.

Here is information related to how to create corporate financial reports correctly.

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ESEF Report Dashboard provided by Amana

Someone pointed Microsoft Power Query out to me.  It is hailed as a way to pull external data into a system.  To use it, simply go to the "Data" tab in Excel.

What PowerQuery seems to do is turn Excel into a relational database.

How do you actually make the "always on" audit work? Machine readable XBRL-based reports need to be provably properly functioning logical systems.

Luca is a proof of concept for creating XBRL-based financial reports using a logical model of a financial report (i.e. XBRL technical syntax is hidden).  Pacioli is the beginnings of a commercial quality, scalable, enterprise class logical "platform" or "toolkit" or "infrastructure" for working with XBRL-based financial reports.

As Stephen Covey says in his 7 Habits of Highly Effective People, "Begin with the end in mind." (Habit 2)

How can an external financial reporting manager, internal auditor, or third party auditor evaluate an XBRL-based financial report and be sure that the report (a) is a properly functioning logical system and (b) conveys the meaning that is intended to be conveyed? What tool would they use?

Well, that is the end game: that tool. As explained in this concept paper, Pacioli will be used to create that tool.

Here is my third draft of an interface idea brainstorming for that accountant/auditor tool.

Creation tools and the accountant/auditor report examination tool are tied together per my best practices based method for creating an XBRL-based digital financial report.  This method is proven with four software implementations: 

• Pesseract
• Pacioli
• XBRL Cloud
• XBRL Query

The bigger picture is effective automation of the entire record to report process to the extent that is possible. What is the extent that is achievable?  Somewhere between what exists now and full automation which is the theoretical objective, not sure if it is really attainable.

Per the notion of irreducable complexity and the law of conservaction of complexity, you cannot just leave necessary pieces out of a system but you can move the complexity around, hiding it.  Pacioli helps hide complexity.

Luca and Pacioli will be used to "connect the dots", pulling all the moving pieces together to create a complete system.  No silo mentality.  Sound engineering. All this builds on the ancient double entry accounting model documented by Luca Pacioli. It's all just math!

What will an XBRL-based digital financial report creation tool look like?  An analysis of existing financial reporting-type tools helps you get your head around that: 

• TurboTax: In the paper about computational law, Intuit's TurboTax is held out as a rudimentary expert system. If you have ever used TurboTax, then you know that it is pretty easy to use.  You can import information into TurboTax.  But the down side is that TurboTax is inflexible in that it is only for creating the tax forms created by Intuit and provided within TurboTax.  TurboTax does not let you adjust the model.  That contributes to making TurboTax easy to use, but limited in what it can do.
• CaseWare Financials: CaseWare Financials is held out as being "an end-to-end solution to fully automate financial statement preparation and financial reporting using best of breed statement and note examples that comply with" supported financial reporting schemes such as US GAAP, IFRS, ASPE (Canadian GAAP), GAS (governmental accounting standards in the US), IPSAS (governmental accounting standards around the world).  You can import general ledger transactions.  You can configure the presentation of reported information.  However, CaseWare Financials has a very steep learning curve (i.e. hard to use), it is incredibly hard to "extend" financial reporting schemes for things that might be missing or unique to a reporting economic entity.  You are stuck with the reporting schemes CaseWare supports because you cannot do things like import the entire US GAAP XBRL Taxonomy or IFRS XBRL Taxonomy.  CaseWare tends to be on the expensive side.
• Accurri: Accurri is somewhat similar to CaseWare. They provide a nice demonstration that helps you see how this sort of software works.
• Workiva: Workiva has been gaining market share over the past ten years. When I was familiar with it you could not import general ledger information (like CaseWare).  It tends to be hard to use and expensive, certainly not for reporting by smaller companies.  Workiva supports using XBRL but you cannot just create your own XBRL taxonomy, pull in into Workiva, and then use it.  That would be really nice.
• Blackline: Blackline talks about "smart close" and "continuous accounting" and hold themselves out as an automation platform.  But, it really does not have a reporting tool that I am aware of.  What is interesting is the Blackline + Workiva partnership.
• Excel + Word: Microsoft Excel and Word to create your own "system" for creating financial reports.  You can import anything that you want, but you have to build the import.  You can format reports pretty much any way you want.  But you have to do the formatting.  You can automate quite a few things, but you have to build all of the automation.  Last I heard, about 85% of external financial reports were created using Microsoft Excel and Word.

So what if you could take the best characteristics of each of these different products above or other products and synthasize all of those features into one product.  Could that product be created?  Cheap, easy to use, integrated with accounting system, generate XBRL, expert system that understands financial reporting, automate as much as possible, financial reports that look like you want them to look but are also machine-readable, high-quality.  How nice would that be?  You never know; perhaps the market will create that tool!

I am holding out this TB Financial Reporting Scheme XBRL Taxonomy as a best practices model financial reporting XBRL taxonomy.  What I want to supplement this model with another model that uses XBRL dimensions and all of the information patterns in the Proof representation.  If you wanted a model that already uses XBRL dimensions, I would point you to the Not-for-Profit XBRL taxonomy for the time being. That XBRL taxonomy is good, but I want to modify the interface to the taxonomy.

This model helps those that are interested in understanding the nuances and subtleties of how XBRL taxonomies work. This is a very basic XBRL taxonomy with both positive and negative examples that help professional accountants understand the ramification of XBRL taxonomy creation choices.  The best practices model was created by taking the very best ideas of other XBRL taxonomies.

To get the most of this best practices model, I would encourage you to: 

1. Watch this video playlist, Understanding the Financial Report Logical System.
2. Work through the Corportate Financial Reporting Examples.
3. Understand the Logical Theory Describing Financial Report.
4. Read through the Essence of Accounting. 

This XBRL taxonomy and the best practices used to created are based on engineering and testing, testing, and more testing.  The following is a summary of software tested to understand software capabilities and interoperability and software used to test the XBRL taxonomy and XBRL instances used to exercise the XBRL taxonomy to be sure it is functioning as expected:

• Pesseract
• Pacioli
• XBRL Cloud
• XBRL Query
• UBmatrix XPE

The following is a summary of the beginnings of a comprehensive financial reporting semantics conformance suite to test and certify software for XBRL-based digital financial reporting: 

1. Preliminary conformance suite
2. TB Financial Reporting Scheme report repository
3. Not-for-Profit report repository
4. MINI prototype financial reporting scheme report repository
5. XASB prototype financial reporting scheme report repository
6. Mastering XBRL-based Financial Reporting examples

Any feedback will be gladly accepted.  I will explain more over the coming weeks.

I heard an excellent phrase today: always on audit.  THAT is how audit's should be.  Always on.  That term comes from Engine B who is creating a Common Data Model (CDM) for audit. They say it will enable lower cost audits and easier audit rotation between audit firms.  In this article, Engine B describes always on audit:

Within 10 years some of us will be performing a highly-automated, always-on, data-led audit. Instead of starting with the financial statements and testing samples, auditors will be using machine-vision to confirm 100% of basic transactions to e-invoices.

Engine B is the fourth organization trying to make audits more effecient through standardization. So, Engine B has their Common Data Model (CDM). Here is v1.1 of that CDM. ISO has their Audit Data Services. The AICPA has their Dynamic Audit Solution Iniative.  OECD has their guidance for standard audit files.

All this dovetails nicely with my notion of automation of the record to report process. Perhaps all this will help fix auditing.

It also fits into what Mindbridge.ai is doing with their AI Auditor.

XBRL-based financial reports are part of this equation.  Gotta make sure they are properly functioning logical systems.

This article helps you understand the next generation of professional services.