Digital Financial Reporting

A de facto good practices industry standard digital general purpose financial report metamodel is emerging.

By de facto I mean that while no one has actually published one specific document explaining that standard; practices that exist in reality, even though they are not officially recognized; standards do, in fact, exist. 

By best practices I mean that a method or technique that has been generally accepted as superior to any other known alternatives because it produces results that are superior to those achieved by other means or because it has become a standard way of doing things. Sometimes people are offended by the term "best practices".  A more politically acceptable term that means effectively the same thing is "good practices". The point is; they work better than existing known alternatives.

By industry standard I mean the normal or ordinary or typical or average manner of doing things within an industry.  It is how an industry governs itself.

By digital I mean BOTH readable and understandable by machine based processes. PDF and HTML are technically readable by software applications...but they are not understood by that software.  XBRL is machine readable and can be made machine understandable if the right machine readable information is provided.  As a by product, digital is also readable and understandable by humans.

By general purpose financial report I mean a high-fidelity, high-resolution, high-quality information exchange mechanism used by an economic entity to report the financial position, financial performance, and liquidity of that entity.  Typically general purpose financial reports are provided to parties that are external to that organization (i.e. external financial reports including policies, notes, and qualitative information).

By metamodel I mean a model that is followed by all report models.  For example; Microsoft, Apple, Google, Amazon, Facebook, and Salesforce each have a report model that is used to represent their individual financial reports. But ALL of those reports follow the same common, standard SEC report metamodel.  The ESMA also provides a standard report metamodel.

And so what is the basis for this de facto good practices industry standard digital financial report metamodel? Here is a list:

• US GAAP Financial Reporting Taxonomy Architecture: One of the very first general purpose financial report implementations was created by the U.S. Securities and Exchange Commission.  XBRL US was charged with creating the XBRL taxonomy to support that endeavor.  To achieve this, XBRL US created this architecture document.  Mantenance of this taxonomy architecture was transitioned to the FASB.  The original document published by XBRL US is better, but this document will do the trick.
• SEC's EDGAR Filer Manual: In support of XBRL-based filings of financial reports to the SEC, the SEC created this manual.  It has some excellent information; but it also leaves a lot out.  The result: quality problems. Bad practices that are allowed by the SEC are not allowed in the de facto good practices metamodel.  But, we take all the good practices.
• European Single Electronic Format (ESEF) Manual: In support of XBRL-based filings of financial reports to the ESMA, the ESMA created this manual.  Again, some excellent information; but it also leaves a lot out. The ESMA and SEC are more similar than they are different.
• XBRL International Open Information Model 1.0 (OIM): Useful information, but tending to be too technical in nature; the OIM helps one understand that a semantic model of a business report is necessary.
• OMG's Standard Business Report Model (SBRM): While not yet published, OMG is creating a logical conceptualization of a business report.  There are drafts provided in UML.
• Logical Theory Describing Financial Report: This logical theory which provides axioms, theorems, and a world view was created by reverse engineering XBRL-based reports that have been submitted to the SEC and is the basis for the Standard Business Report Model.  This is effectively the model I have implemented.

All of the above information was synthesized and implemented, generally with my assistance, by the following commercial software companies, working proof of concepts, and prototype software applications:

• XBRL Cloud: (Commercial software) Implemented about 95% of the metamodel.  This can best be seen in their CleanScore Evidence Package. (Here is the evidence package, fundamental accounting concepts, and disclosure mechanics and reporting checklist validation for the 2017 Microsoft 10-K; Similar examples are provided here for Apple, Google, Amazon, Facebook, and Salesforce)
• 28msec/NTT Data: (Commercial software) Several years ago I helped 28msec implement XBRL in their database.  They learned a lot, I also learned a lot and used that to help tune my model. Apparently 28msec was sold to NTT Data.  28msec implemented about 60% of the model.
• Pesseract: (working prototype) Pesseract is a working proof of concept that implements about 95% of the metamodel.
• Auditchain's Pacioli: (Commercial software) Pacioli is by far the best and most complete implementation of this metamodel.  I have performed rigirous testing using multiple financial reporting schemes.  The current interface is the GUI used for testing Pacioli; a new interface is scheduled to be put on and additional enhancements are planed as I understand it.
• Luca: (Pre-release commercial software) Cloud-based Luca is pre-release software for creating XBRL-based reports.  The interface of Luca explains the fundamental report model very well.  I don't know how to quantify how much this supports; it supports 100% of the report model but none of the supplemental validation stuff yet.
• Open source Microsoft Access Database: (prototype) This is a working prototype that I created.
• ACCIZOM: (Commercial software) I don't know a lot about ACCIZOM yet, but they say they support this metamodel and the Seattle Method.  I have not yet confirmed that, but will.
• SCI: (Commercial software) SCI is building an expert system for creating financial reports and is leveraging the Seattle Method.
• Awther: (Commercial software) Awther is building an expert system for creating financial reports and is leveraging the Seattle Method.

OMG and XBRL International both call for only two implementations to support their standards.  I have seven.  Technically, you could say that the 30 software vendors that support XBRL-based reporting support this model because SEC filings support the model.  Now, many of those SEC XBRL-based reports are inconsistent with the logic of the metamodel, but that is a problem in the creation of the reports, not the metamodel.  Same can be said for ESMA reports, but I don't have any data on those yet.

It would be fantastic if a formal ISO standard for digital financial reports was created.  Alternatively, be nice if XBRL International or OMG issued such a formal standard.  For now, de facto is best I can do.

Try out my method, which I call the Seattle Method, for leveraging this industry standard for implementing automation within the enterprise.

National Public Radio (NPR) published a story, The Accountant Who Changed the World, that discusses how Luca Pacioli ran across double-entry accounting in a math book he wrote.

Luca Pacioli was a monk, magician and lover of numbers. He discovered this special bookkeeping in Venice and was intrigued by it. In 1494, he wrote a huge math encyclopedia and included an instructional section on double-entry bookkeeping.

That article seems to be based on information from a book written by Jane Gleeson-White, Double Entry: How the Merchants of Venice Created Modern Finance.

Luca Pacioli seems to have "discovered" the special bookkeeping method in Venice, but as I understand it that method was invented in Florence by banks.  But Pacioli seems to have perfected and documented the best practices used in Venice which became known as the Venetian Method.  The article says he was a monk, a magician, and a lover of numbers that hung out with the likes of Leonardo da Vinci!  How cool is that!!! (I have actually visited the house where Luca Pacioli lived in Venice.)

Note the subtitle of Gleeson-White's book, particularly the phrase "Created Modern Finance".  Modern finance seems to have been relatively stuck at that same point in many ways.  Well, we are in the midst of another big change in my opinion, "biggest in 500 years" one accountant called this. Someone else said triple-entry accounting is the most important invention in 500 years. Others call this the move to "modern accounting".

Let me tell you the story of another accountant.  About 20 years ago he worked at the regional public accounting firm Knight, Vale, & Gregory based in Tacoma, Washington.  (He got his initial start with Price Waterhouse.)  He read a book about XML, with some help of a friend and colleague named Wayne Harding, also a CPA, reached out to the AICPA, the AICPA bought into the idea and created what became XBRL International, and now there are 180 projects in 60 countries that leverage XBRL.

This is not the end of the story.  This is the beginning of the story.

We need to leverage the technologies that have been developed over the past 50 years and avoid possible pitfalls as we modernize accounting.  We need to break down accounting into its essence as we think about how to build it back better.  We need a good theory, principles, framework, and a method; digital financial reporting needs to work as good as or better than current financial reporting practices.

Financial reports are knowledge graphs.  Financial reports have always been knowledge graphs! What changed is that we have moved from an industrial economy to an information economy.  Financial accounting, reporting, auditing, and analysis need to pivot; to transition.  The tools that are causing things like "information overload" and ever increasing "complexity" are also the tools that can be used to solve those problems.

Double-entry accounting enabled organizations to grow into the large multi-national organizations of today. But now; audit is broken.  Reporting is a kludge. Accounting needs modernization. Financial instrtuments are unnecessarily complex.

Lost? Not sure what to do?  I don't have all the answers.  But, I have a lot of incredibly good questions that deserve answers.  If you are not sure where to start, I recommend reading the Seattle Method. That will get you to my best information.

Be the accountant who changed the world!

Want to learn about XBRL-based digital general purpose financial reports? Working through the Luca tutorials that I have created might be very helpful.

I have made significant updates to the documentation related to how to use the cloud-based version of Luca which is an XBRL-based financial report creation tool. To get to the tutorials, go to this blog post in the list you see below:

The tutorials are not yet complete; I will make updates as the Luca functionality improves.  In particular, you might very well find the Accounting Equation, SFAC 6, Common Elements of Financial Statements, and MINI Financial Reporting Scheme quite useful if you want to understand XBRL-based digital general purpose financial reports.

Digital financial reporting is here to stay.  It could be looked as an "incremental innovation", just another tool accountants have available.  It could be looked at as something that will revolutionize accounting, reporting, auditing, and analysis, a "disruptive innovation".  Learn about the tool to figure out which.  Either way you  look at it, digital financial reporting is here to stay.

Blackline provides an excellent book, Modernizing Accounting for Dummies, from which every accountant would very likely derive some sort of benefit. The book points out the benefits of modernizing accounting and strategies for getting there.  Of course readers need to be very careful.  That book was written by Blackline and of course they want you to buy their products to modernize your accounting.

As long as you are a conscious, competent buyer you can avoid the snake oil salesmen that provide no real value that are trying to separate you from your hard earned money.

Here is a list of the major pitfalls to avoid as you consider how you will modernize your accounting: 

• Nonstandard (i.e. proprietary): Avoid any solution that does not employ standard approaches and uses proprietary approaches to lock you into their specific solution. The leverage offered by standard approaches are superior.
• Closed source (i.e. not open source): Where open source solutions exist use open source.  Sometimes that is not possible, but often it is possible.  The leverage offered by open source software tends to offer superior results.
• Technically oriented solutions (i.e. unnecessary complexity): If you remember the good ole days before USB and how complex it was to connect a printer to your computer you will understand this.  Modern accounting solutions are not technical things that the information technology department needs to do for you.  Modern accounting solutions will be well-thought-out and the technical aspects will be buried and hidden from the business users that make use of the technology to solve problems.
• Unproven (i.e. untested, not proven to work effectively): Never let a software vendor walk you through their demonstration; rather, you tell them exactly what you want to see demonstrated.  Why? When a software vendor controls a demonstration they will not be showing you the rough areas of their software.
• Unimaginative (i.e. not very innovative): Modern accounting will be transformational.  Changing one or two things with a fundamentally flawed process is not "modernizing accounting".  Consider changing the process entirely. Creating a proper foundation will let you innovate for the next 50 years. An improper foundation will likely be a dead end.

One issue that I have with Blackline is that they say to use standards but in their book they never mention one standard.  That is a bit odd to me. Be careful out there!

"The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself.  Therefore all progress depends on the unreasonable man." -- George Bernard Shaw

Be unreasonable.

Financial Report Knowledge Graphs helps professional accountants understand that financial reports are knowledge graphs. In the past these financial report knowledge graphs were readable only by humans.  Today with XBRL-based financial reports these financial report knowledge graphs are also readable by machines.

If you think about it you will quickly recognize that the knowledge in those knowledge graphs are the same knowledge for different parties that use that knowledge: 

• The set of logical statements that is used to specify/describe how a report should be created (say by a regulator or standards setter),
• The set of logical statements used to actually create a report (say an accountant),
• The set of logical statements used to verify that the report was created consistently to the specification/description (say an accountant or software application used by an accountant),
• The set of logical statements used to independently confirm that the report was created consistently with the specification/description (say by an independent auditor),
• The set of logical statements used to extract information from the created report (say by a financial analyst or regulator).

This realization is depected well in this graphic created by Auditchain. A lot of that knowledge will be instantiated in the form of NFTs.  Those NFTs, which will be created by accountants (see The Economics of Digital for CPAs) and will control processes.  If you are trying to understand this using the paradigm that has in place for the past 100 years, you will not understand.  You need to adjust your thinking, here are the new rules.

What does a professional accountant need to understand in order to position herself or himself appropriately for the next 25 years?  There are two key things that business professionals intuitively or innately understand: 

• Fundamentals of knowledge graphs (see Financial Report Knowledge Graphs)
• Computational thinking (see Algorithmic Business Thinking and  Computational Professional Services)

Modern accounting is on its way. Traditional audit is doomed.

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