Digital Financial Reporting

Artificial intelligence to be 'the norm' in law firms in 2020, is the title of an article claiming that all law firms will need to leverage artificial intelligence in the future as a standard technology investment. 

So, my first question is this: how will artificial intelligence impact professional accounting firms?  My second question is: what exactly do they mean by 'artificial intelligence'?

Merriam-Webster provides this definition of artificial intelligence:

: an area of computer science that deals with giving machines the ability to seem like they have human intelligence

: the power of a machine to copy intelligent human behavior

Basically, artificial intelligence is about making a machines mimic or simulate human intelligence.  There is no magic involved.  Machines, long before computers, have simulated human behavior.  Take the Babbage difference engine.  That was basically a mechanical calculator.  All hardware.  Computers are machines.  But what makes a computer unique is that while you do have some hardware, you also have software which makes changing what the machine does significantly easier.  That allows for the machine to change what it does because you can easily change the instructions.

Undoubtedly computers will have an impact on the work practices of accountants.  While I personally don't like the term artificial intelligence because the term is somewhat overloaded and it means different things to different people; I do believe computers will have a significant impact on financial reporting and the financial report.  I prefer to describe how this will happen as the creation of expert systems which leverage the structured nature of information which will enable new ways to create and work with financial reports.

The article goes on to give these steps to deploying the technology:

"Number one, you've got to get that artificial intelligence is going to fundamentally change the market. Number two, you've got to be able to deploy the technology - and that means you understand what's the right technology, what's available and how to use it. Number three, you've got to use it."

I completely agree that step 1 is "getting" that a fundamental change is about to take place.  And I agree that step 2 is "understanding" so that you will not be fooled by those trying to sell you a bill of goods.  And I agree with step 3 that "use it" is the best way to learn it and understand what the technology will and will not be capable of doing.

US public companies are getting the opportunity to have a look at the future of financial reporting.  In fact, they are blazing the trail.  Most don't even understand that that is what they are doing.  They see the SEC mandate to report using XBRL as more of an expensive and useless nuisance than experimentation with a cutting-edge technology.  But that will change; in fact, it is changing already although slowly.

If you want to better understand how law firms, professional accounting firms, and financial reporting will likely change; the document Knowlege Engineering Basics for Accounting Professionals is helpful.

The American Institute of Certified Public Accountants (AICPA) took bold leap back in 1998 when it started its journey toward digital financial reporting.  Perhaps lawyers and other professionals can learn from what accountants have been able to put together with the help of some information technology professionals.  While digital financial reporting still has some rough edges, a lot has been learned.

Digital financial reporting is not only inevitable, it is imminent.  Could it be the norm by 2020?

The FASB released a proposed 2016 US GAAP Financial Reporting Taxonomy in XBRL and is taking comments until October 31, 2015.  Taxonomies such as the US GAAP Financial Reporting XBRL Taxonomy are important tools in our digital age and as I mentioned in the document Knowledge Engineering Basics for Accounting Professionals, taxonomies overcome the four major obstacles of getting a computer system to perform work:

• Business professional idiosyncrasies: different business professionals use different terminologies to refer to exactly the same thing.
• Information technology idiosyncrasies:  information technology professionals use different technology options, techniques, and formats  to encode information and store exactly the same information.
• Inconsistent domain understanding of and technology's limitations in expressing interconnections: information is not just a long list of facts, but rather these facts are logically interconnected and generally used within sets which can be dynamic and used one way by one business professional and some other way by another business professional or by the same business professional at some different point in time.  These relations are many times more detailed and complex than the typical computer database can handle. Business professionals sometimes do not understand that certain relations exist.
• Computers are dumb beasts:  Computers don't understand themselves, the programs they run, or the information that they work with.  Computers are dumb beasts. What computers do can sometimes seem magical.  But in reality, computers are only as smart as the metadata they are given to work with, the programs that humans create, and the data that exists in databases that the computers work with.

The US GAAP Financial Reporting XBRL Taxonomy is a formal specifications.  Formal specifications are precise, concise and unambiguous.  Formal specifications are communications tools.  Because taxonomies use machine-checkable notation, a wide variety of automated checks can be applied. The disciplined approach of using formal specifications means that subtle errors and oversights will be detected and corrected.

An example of these checks is the fundamental accounting concept relations that I test each month.

Taxonomies both describe the information being worked with and verify information consistency against that description to avoid information quality problems or inconsistencies.  When creating information it is important to verify that what has been created is consistent with the expected description.  When consuming information it is important to understand that the information being consumed is consistent with the expected description. Remember: nonsense-in-nonsense-out.

The first two obstacles which related to the problem of business professional idiosyncrasy and technical idiosyncrasy are overcome by using a taxonomy to standardize terminology.  Rather than using arbitrary  terminology to express information about some business domain, standard terminology is used.  This includes selecting the appropriate important terms and defining the terms in a deliberate, rigorous, clear, logically coherent, consistent, and unambiguous manner.  Care is taken to precisely and accurately reflect reality using standard terms.

The third obstacle of expressing the rich logical interconnectedness of facts within and across business systems can be overcome by using general ontological theories disciplined, methodical, and rigorous approach to structuring the relations between terms.  Meaning, expressed using machine-readable taxonomies, must be exchangeable between business systems not just used within your one system.
Beginning with a rigorous and logically coherent specification of the theoretical information to be implemented makes it possible to address the problems of human idiosyncrasy.

Given the idiosyncratic tendencies of business professionals; interpretations which reflect the arbitrary peculiarities of individuals can sometimes slip in or mistakes can be made when expressing such terminology.  Further, parts of our understanding of a business domain can be incorrect and even evolve, improve, or simply change over time.

If different groups of business professional use different terminology for the same concepts and ideas to express the exact same truths about a business domain; those business professionals should be able to inquire as to why these arbitrary terms are used, identify the specific reasoning for this, and specifically identify concepts and ideas which are exactly the same as other concepts and ideas but use different terminology or labels to describe what is in fact exactly the same thing.  But to also understand the subtleties and nuances of concepts and ideas which are truly different from other concepts and ideas.

If idiosyncrasies result only in different terms and labels which are used to express the exact same concepts and ideas; then mappings can be created to point out these different terms used to express those same concepts and ideas.  Such mappings make dialogue more intelligible and could get groups to accept a single standardized term or set of terminology for the purpose of interacting with common repositories of business information, such as the SEC's EDGAR repository of public company financial reports.

If the difference in terminology and expression are rooted in true and real theoretical differences between business professionals, and the different terms express and point out real and important subtleties and nuances between what seemed to be the same terms; then these differences can be made conscious, explicit, clear, and therefore they can discussed, in a rigorous and deliberate fashion because the differences are consciously recognized.

The best indicator of whether a taxonomy is working or not is whether it achieves the goal; whether the comunication between the creators of information and the consumers of information is successful.

Consider these ideas and consider commenting on the proposed US GAAP Financial Reporting XBRL Taxonomy.