Digital Financial Reporting

In a video presentation, Louis Matherne of the FASB made the following statement (see between minute 52:40 and 53:00)

"I believe in this vision: The XBRL report is a replacement for the traditional print report."

Now, I am not saying that this is the official position of the FASB.  I am simply pointing out that in a video presentation, Louis Matherne who works at the FASB made a statement.

That statement is a bit more aggressive that my belief.  In my personal view, an XBRL-based general purpose financial report will be a digital alternative to traditional paper or "e-paper" (HTML, PDF, Word) general purpose financial report.  The case for digital financial report is straight forward.

Are we there yet?  Not quite.  XBRL-based financial reports have been used by public companies reporting to the SEC for over ten years now.  The ESMA in the European Union recently formalized into lawthe use of XBRL for the reporting of listed companies which will begin in January 2020.  Many other regulators around the world use XBRL.  The U.S. states of Florida and Californiaare ramping up to use XBRL-based reporting.  The momentum is building in other states.  While not there yet, even the federal government is moving toward digital financial reporting.

But why would private companies use XBRL? What if XBRL-based reporting were better, faster, and cheaper than traditional approaches? With things like "the finance factory" and "the modern finance platform" that can happen.

But for an XBRL-based report to replace traditional reports, quality must be paramount. If XBRL-based reports don't work and therefore the information is not reliable, that will be a deal breaker.

XBRL-based reports can work.  When you want to put a payload into earth's orbit, you have to follow the laws of physics.  Similarly, when you want to effectively exchange information between machines, you must follow the laws of computer science. It really is that straight forward.

In order to get XBRL-based reports to work the way professional accountants and other stakeholders to work the way they want them to work; stakeholders need to be effectively engaged.  To be effectively engaged, all stakeholders need to come to the table prepared.

And so how do you prepare?  Where do you start?  Start here.  Understand how computers perform work.  I took notes for the past 10 years and synthesize, summarized, and organized those notes into the document Computer Empathy.  The document is not perfect, but it has the information you need.

Keep in the back of your mind that this is a paradigm shift.  Your existing maps of the world will not help you to understand the new world.

Want to know more? Here is everything you need to konw to have an intelligent conversation about XBRL-based digital financial reporting.

Here is the EU law that mandates the European Single Electronic Format (ESEF) and mandates that the financial statements be submitted to the European Securities and Markets Authority (ESMA) using Inline XBRL.

Fortunately, the ESMA will be using an approach that is very similar to the U.S. SEC's approach to XBRL-based financial reports with a couple of incremental improvements.  The ESEF introduces the notion of "anchoring" and "wider-narrower" concepts.  So, that is good.

However, other information is still not represented that is necessary (see the ontology spectrum) to help assure quality XBRL-based financial reports.  As such, you can expect quality issues simiar to the quality issues being experienced by the U.S. SEC XBRL-based financial reports.  The ESMA field test already shows quality issues when the 23 reports are run through a good validator.

This is kind of disappointing but not really unexpected.  When people keep seeing the same issues appear over, and over, and over; perhaps these regulators will figure out that they need to modify their approach.  Some times people need to learn by making their own mistakes.  But I really don't see why the ESMA did not learn from the SEC's mistakes.

Also, today each different regulator creates their own approach to XBRL-based digital financial reporting.  Why is that necessary?  If you look at the high-level financial accounting concepts of different reporting schemes, they are essentially very similar or even identical.

Why the inconsistencies between different regulators?  These inconsistencies are unjustifiable.  What if someone created a standard approach to business and financial reporting?  Well, the Object Management Group (OMG) is creating such a standard.  You can find information about that proposed OMG standard, Standard Business Report Model (SBRM) here.

Why are the ESMA and SEC both making these mistakes?  I suspect that it has to do with the four misconceptions most people have about XBRL-based reports in general.

Today, when it comes to XBRL-based digital financial reports, there tends to be three broad groups that people fall into: believers/optimists, naysayers/skeptics, and deniers that believe XBRL-based reporting will never happen.

All three groups tend to be equally confident in their positions.  Whether you share the vision of someone at the FASB who believes XBRL-based reports is a replacement of traditional paper or e-paper reports or simply see XBRL as an alternative format; you will want to at least discuss XBRL-based reports intelligently.

This guide answers some of the most frequently asked questions about the subject of XBRL-based digital financial reporting, presenting both the optimistic and more skeptical viewpoints to arm you with enough knowledge and insight to hold your own in your next conversation about XBRL-based digital financial reporting.

What are the benefits of XBRL-based financial reports?

The case for XBRL-based general purpose financial reports is provided here. Here are the cliff notes.

A general purpose financial report is a high-fidelity, high-resolution, high-quality information exchange mechanism.  That mechanism has historically used the media of "paper".  Over the past 50 years or so, that paper-based mechanism has given way to a new mechanism, "e-paper".  By "e-paper" I mean PDF documents, HTML documents, Word documents and such.

XBRL is a new media, a new mechanism for creating a general purpose financial report.  XBRL is a high-fidelity, high-resolution information exchange media that allows for the creation of high-quality financial reports.  Those reports can be read by human-based processes as before but because of their structured nature are also effectively readable by machine-based processes.

The benefits of machine-readable XBRL-based include better transparency, improved capital allocation decisions, improved management decisions, and better functioning capital markets.

XBRL is not a panacea, it is a tool.  If used correctly, the tool can be used to achieve wonderful things.  Just like anything else created by man, XBRL has it's share of flaws. Will XBRL replace all paper-based or e-paper based financial reporting?  Probably not.  But, XBRL is hear to stay.

What exactly is XBRL anyway?

So that is actually a very good question.  The short answer is that XBRL is a global standard knowledge media or medium for representing financial and non-financial information.  XBRL is a global standard approach that can be used to represent knowledge and information in a form that is both human-readable and machine-readable.  This capability will impact financial accounting, reporting, auditing, and analysis.  It will also very likely impact other types of business reporting.

A financial report is a logical system. XBRL is an approach to representing that logical system in a machine-readable format.

But answering the question is a bit tricky because today, most professional accountants don't really have the correct knowledge set to understand a brief, precise explanation as to what XBRL really is.  Think of understanding XBRL as a journey.  Step one in your journey is to watch these four brief videos.  That will get you started.  But you also need to understand some background information about how computers perform work.  The document Computer Empathy will help you understand that.

Understand that XBRL is part of what will make what Deloitte calls "the finance factory" actually work, or what Blackline calls "the modern finance platform".  XBRL is an enabling technology.

Fundamentally, XBRL enables the high-quality, high-resolution information contained in a financial report to be exchanged between machine-based processes reliably.

The challenge is to (a) get XBRL-based reports to be easy for the average professional accountant to create, (b) the reports be of very high quality (i.e. sigma level six, measurably 99.99966% correct), and (c) safe, reliable, and predictable.  All three of those goals are achievable.

When will XBRL-based digital financial reporting truly work?

Well, if implemented correctly; XBRL-based digital financial reporting already works.  The problem is not making XBRL-based reporting work, the problem is overcoming the misconceptions people have about XBRL and what it takes to make it work correctly.   Fundamentally, the issues are (a) getting XBRL taxonomies created correctly, (b) getting software vendors to properly implement XBRL-based reporting in their software leveraging the proper metadata, (b) getting XBRL-based reporting software to interoperate, (c) making the software easy enough for professional accountants to actually make use of the software. If taxonomies were created appropriatly and software leveraged those taxonomies; the software would be easier to use and there would be substantially fewer quality problems.

If software works correctly, quality problems that seem to persist today will disappear.  Today, filing agents tend to create the highest quality XBRL-based financial reports because the filing agents create hundreds if not thousands of reports a year.  So, this proves XBRL-based reports can work.  The problem is that not every software application works appropriately and software tends to be extremely hard to use.

The best thing for professional accountants to do is educate themselves so the software snake oil salesmen cannot take advantage of your ignorance.  Software vendors love ignorant buyers.  Become informed, be demanding of software vendors, test software to be sure it works appropriately.

Knowledgeable buyers ask good questions, get the salesmen to prove their products work, and push the over all capabilities of the market forward.  Ignorant buyers help no one except the snake oil salesmen to separate you from your hard earned money.

What can professional accountants and accounting firms do to get ready for XBRL-based digital financial reporting?

The best thing that a professional accountant or a professional accounting firm can do today is to learn about the new paradigm that exists.  Understand that those coming out of college today are still being trained per the old accounting, reporting, auditing, and analysis paradigms.  You will have to seek out knowledge.  Today, the best resource that I have seen that explains this new paradigm is a document that I created called Computer Empathy.  Others call the change in paradigm "computational thinking".

Understand that the "artificial intelligence revolution" or the "fourth industrial revolution" or whatever you want to call it is real.  The impact will be significant and you need to have a plan. Figure out where you are now, where you want to go, understand consciously if where you want to go is where you should be going, and then figure out how to get there. Don't be left behind!

The transition will take time.  Timing is important. Being knowledgable helps you figure out the proper timing.

Are 47% of accountants and auditors really going to lose their jobs?

The short answer is no.  An Oxford University study and others are predicting that basically every job will be performed by robots in the future which is completely absurd.  However, that said; it is important to understand that a huge shift will occur.  Don't think of this in terms of "jobs", think of it in terms of "tasks".  A job can be broken down into tasks.  Tasks can be broken down into the following categories of work:

• manual repetitive (predictable)
• manual nonrepetitive (not predictable)
• cognitive repetitive (predictable)
• cognitive nonrepetitive (not predictable)

If the work you perform is repetitive and therefore predictable, that task can perhaps be automated.  But, for every job that is replaced by a robot, different more value added work can be performed and/or new jobs and tasks will be created.  No one really understands exactly how all this will unfold, but this change will highly likely be very significant.

But make no mistake, The Digital Industrial Revolution is real.  This 56 minute Ted Talk will help you understand this revolution which is here now, it is happening today.

Action has a risk associated with it.  But inaction likewise has a risk associated with it.

What sorts of innovations will be created relating to financial reporting?

While it is hard to know for sure, the repetitive nature of aspects of accounting, reporting, auditing, and analysis lends itself to automation.  What will enable automation is things like the move from unstructured nature of financial reports to structured, machine-readable financial reports. Personally, I am helping to create what amounts to an expert system for the construction of a financial report.  You can download and experience the application for yourself.

Fundamentally, software applications will be created that leverage artificial intelligence and enable human and machine collaboration to complete accounting, reporting, auditing, and analysis tasks.  This is very much like a calculator helps accountants do math more efficiently and effectively.

No one can predict the future.  But, being knowledgeable helps you make an educated guess.

Why should I participate in creating the technology?  Can't I simply use the technology?

As the authors of the book The Technology Fallacy point out, people create change not technology.  Technology only enables the possibility to create the change, but people do the work and apply a technology to achieve their vision.  Technology does not shape destiny, we shape our own destiny.  A perfect way to understand the change is to participate in creating the destiny of accounting, reporting, auditing, and analysis.

You really don't want to "pass the buck" to the techies.  Do you REALLY want them creating your future without your input???

How does XBRL relate to digitial distributed ledgers?

XBRL-based financial reports and digital distributed ledgers are a match made in heaven. A lot of people use the term "blockchain" when they mean digital distributed ledgers.  But blockchain is only one of many different technologies that can be used to implement a distributed ledger.  Digital distrbitued ledgers are another very important enabling technology what will revolutionize accounting, reporting, auditing, and analysis.

Am I missing something?  What else should I be considering?

Something that most people miss is the connection between the techniques and philosophies of Lean Six Sigma and XBRL-based reporting.  When you combine (a) XBRL-based structured information, (b) the distibuted databases offered by digital distributed ledgers, (c) the capabilities of artificial intelligence to perform work leveraging all that structured information and distributed ledgers, and (d) the measurement and process control techniques of Lean Six Sigma to manage and control quality you can create the sorts of things you see in Deloitte's vision of The Finance Factory. Deloitte calls this "digitized operational finance".  Others call this "mirror worlds".  All this has applications beyond just accounting, reporting, auditing, and analysis.  But putting all these pieces together correctly will have profound impact on many types of systems, especially accounting systems.

Where can I get more detailed information?

I have been working on understanding XBRL-based financial reporting for about 20 years.  I am making my entire set of "lab notes" available for others.  You can get a summary of those lab notes here. I have created a proven and tested framework and method that I use for implementing XBRL-based financial reporting. This approach is consistent with the proposed OMG Standard Business Report Model (SBRM).  I strongly encourage others to create a plan and implement that plan.

The devil is in the details.  Understanding the details is hard work and not for everyone.  But, understanding the details can provide you with an edge.