Digital Financial Reporting

Are you ready for the "digital switch-over" for U.S. federal grant reporting?

The Data Foundation published the following report which is excellent information: Transforming Federal Grant Reporting: Open the Data, Reduce Compliance Costs, and Deliver Transparency. You can read most of the report on that link or you can provide your email address and download an easier to read PDF.

Here is my synopsis: The report describes the flaws in the existing document-centric federal grant tracking and management system and how an open data standard, such as XBRL, can both increase transparency within the system and reduce costs of compliance with federal grants and of operating and managing the system.

This is a description of the report provided by the Data Foundation:

In this report, the Data Foundation describes the flaws with the federal government’s current document-based grant reporting system and envisions an open data future for the way grants are tracked and managed.

The federal government continues to rely on outdated, burdensome document-based forms to track $662.7 billion in annual grant dollars - but open data could transform the system. Adopting a government-wide open data structure for all the information grantees report would alleviate compliance burdens for the grantee community, provide instant insights for grantor agencies and Congress, and enable easy access to data for oversight, analytics, and program evaluation.

The report explains that the grant reporting system is broken, in two distinct ways: first, it does a poor job of delivering transparency to agencies, Congress, and taxpayers; and, second, grantees sustain unacceptable costs of compliance. Replacing documents with data could address both problems.

Open data or structured information or XBRL-based information or whatever you want to call it is a very good idea. Imagine an "EDGAR"-type system (i.e. the SEC repository of public company financial information in XBRL) for all federal grants.  Imagine the ability to query that information using automated processes.  Imagine a similar system for the financial reports of state and local governments.  Think of the transparency offered to voters, government leaders, economists, financial anslysts, etc.  This can work.  The XBRL-based financial reports public companies are creating and submitting to the Securities and Exchange Commission are beginning to prove that.

The document points out that by replacing document-centric reporting with data-centric reporting using open data, "the government of Australia saves Australian companies over $1 billion annually, because the companies’ software can automatically generate and submit regulatory reports to multiple government agencies at once."

Undoubtedly, federal grant reporting will be part of the "digital switch-over".

So ask yourself some questions:

• What technical format will be used for all this "open data"?  Will it be XBRL-based open data or will it be some other technical format such as the Semantic Web Stack of technologies? Does it matter?  Should you have an opinion?
• Let's say that whoever is responsible for making that decision, I think it is the U.S. Treasury Department, picks XBRL.  What technical architecture will they use for XBRL? Will they use the Standard Business Reporting (SBR) architecture employed by the governments of Australia and the Netherlands?  Or, will they use one of the XBRL implementation styles of the US SEC, UK HMRC, or ESMA? Which is best? Why is it best?
• Who is going to create that "comprehensive taxonomy" that describes all of that open data?  Professional accountants maybe?  They are the ones that created the US GAAP XBRL Taxonomy and the IFRS XBRL Taxonomy.  How good are the US GAAP and IFRS XBRL Taxonomies?  Who decides how "good" they are?  The publishers of the taxonomy?  The users of the taxonomy?  How do you measure "goodness" of the taxonomy?
• Do you, or other professional accountants, have the appropriate skills for creating that comprehensive taxonomy?  Do you have the knowledge to even have an opinion as to how good a taxonomy is?  What skills or experience provided you with that knowledge?
• Will "open data" work?  How exactly do you know it will, or will not, work?  Was enough testing done to make sure that open data will work?  There are quality issues with the XBRL-based financial reports created by public companies.  Will those same issues be repeated in federal grant reporting, or will the issues be fixed?
• How well is open data really working in Australia and the Netherlands?  What public information exists to figure that out?

What is my point?  My point is that it is one thing to have a good idea.  It is another thing to actually implement that idea and make it work.  There is no magic here.  It takes skills, knowledge, good engineering practices, testing, attention to detail, domain knowledge, and other such things to make open data work the way we will want it to work.  In fact, it takes those same skills to decide and specify how it should work.

Ask yourself a question: Do I have the skills I need to do accounting, reporting, and auditing in the digital age?  What are those skills? How do I get the right skills.

Rene van Egmond and I have updated our General Business Reporting XBRL Application Profile to include ideas from the ESEF ESMA Reporting Manual.

This document is a side-by-side comparison of four financial reporting related XBRL-based architectures (US GAAP reporting by public companies to the SEC, UK GAAP reporting by companies to HRMC, IFRS reporting by listed companies to the ESMA, IFRS AU reporting to ASIC) to what I call the "general profile".

There are two uses for the general profile:

1. First, it documents somewhat of a "de facto standard" XBRL application profile for financial reporting.
2. Second, it documents an XBRL application profile that can be used for pretty much any sort of reportng scheme.  Rather than inexperienced people trying to figure out XBRL and repeating the mistakes of others; one can pick up this profile and use it as is or modify/tweak the profile to fit their needs.

To test this application profile, I created my own reporting scheme.

There are two software applications that specifically support this "general profile".  However, there are probably about 60 software applications that are very, very close to supporting the profile and they probably don't realize it.

Any software vendor that supports XBRL-based financial reporting to the SEC (about 6,000 public companies), XBRL-based financial reporting to the HRMC (about 1,200,000 companies), or will support XBRL-based financial reporting to the ESMA (will probably be about 10,000 listed companies) essentially report this "general profile".

The beginning of the "digital switch-over" for financial reporting is here.  There is a lot that general business reporting using XBRL can learn from XBRL-based financial reporting.

The Center for Corporate Reporting published an excellent article about XBRL. The article, The Role of XBRL in Digital Financial Reporting, by Prof. (FH) Mag. Monika Kovarova-Simecek and Prof. (FH) Dr. Tassilo Pellegrini, provides one of the better descriptions of what XBRL really is.

The authors of the article issue the following wake-up call as part of their conclusion:

"This article should be considered a wake-up call to encourage rapid familiarization with new technologies in financial reporting – not just ensuring it is in place at the time of the “digital switch-over”, but by being proactive in understanding advantages and pitfalls. Because in a digital reporting world only those who understand the technology and are able to exploit its creative potential will benefit from digitization."

So, how do you achieve "rapid familiarization"?

First, read Getting Ready for the Digital Age of Accounting, Reporting and Auditing: a Guide for Professional Accountants. That document provides a 15 page high-level overview of what is happening to financial reporting.

Second, read the 187 pages of material suggested at the end of the above document:

• Accounting and Auditing in the Digital Age: About 14 pages which provides additional details related to the big picture of how accounting and auditing will change over the next 10 years and why.
• Conceptual Overview of an XBRL-based, Structured, Digital Financial Report: About a 25 page conceptual overview of what an XBRL-based digital financial report is.
• Digital Financial Reporting General Principles: About 6 pages that synthesize important principles and provides a framework for thinking about XBRL-based digital financial reports and how to make them work correctly.
• Introduction to Knowledge Engineering for Professional Accountants: A 49 page introduction to important basic ideas related to representing knowledge in machine-readable form.
• Comprehensive Introduction to Business Rules: A 28 page introduction to the important role business rules play in making XBRL-based digital financial reports work correctly.
• Comprehensive Introduction to Problem Solving Logic: A 28 page introduction to the important notion of problem solving logic.
• Comprehensive Introduction to Expert Systems: A 17 page introduction to expert systems or knowledge based systems; what they are, how they work, what their capabilities are, etc.
• Comprehensive Introduction to Intelligent Software Agents: A 20 page introduction to intelligent software agents which use business rules and problem solving logic to perform work for professional accountants.

It is a bit of a slog, but until someone condenses this information and lays it out on a silver platter; I contend that it is the best information that is currently available to either business professionals or information technology professionals who want an accurate understanding of this topic.

Why slog through this material?  It will provide you with the ability to understand the future of XBRL-based digital financial reporting.

Today, the European Securities and Markets Authority (ESMA) published the final Regulatory Technical Standards (RTS) setting out the new European Single Electronic Format (ESEF).

Beginning in 2020, this format will be used by listed companies to represent their annual financial reports which are submitted to the ESMA.  ESMA has also published the ESEF Reporting Manual, Preparation of Annual Financial Reports inInline XBRL which provide detailed instructions for creating such XBRL-based digital financial reports.  For more information, see the ESEF web site.

A draft version of the ESMA taxonomy can be downloaded here.

I will provide additional information later; but my initial review of the documentation indicates that the ESEF which will be used by ESMA is very similar to how XBRL-based financial reporting has been implemented by the US Securities and Exchange Commission in terms of architecture if Inline XBRL is embraced by the SEC.  There are a few rather minor technical implementation differences and enhancements.

In my view, this increases the probability that the US SEC will be moving to the use of Inline XBRL.  What that means is that there is one global standard approach emerging to create XBRL-based digital financial reports which is a very good thing.