Digital Financial Reporting

This video, Big Data for Engineers, explain critically important "information engineering 101" principles. The video is understandable by a motivated business professional.  The lecturer is Ghislain Fourny who is able to explain techincal things in understandable ways.  Ghislain is the author of The XBRL Book: Simple, Precise, Technical.

Data Frames

Welcome to a more modern era of accounting, reporting, auditing, and analysis! This will be an era of continuous accounting, continuous reporting, smart regulation, algorithmic regulation, artificial intelligence assisted audits, always on audit, computational professional services.

The Universal Digital Financial Reporting Framework is an XBRL-based approach to creating both human-readable and machine-readable general purpose financial statements.  It is a de facto standard approach based on the best practices learned from creating XBRL-based reports which have been submitted to the SEC and the ESMA and attempting to extract information from the reports effectively.  The framework uses the best practices and avoids the bad practices.  The framework is proven and rigorously tested. The framework and method can be used to automate the entire record to report process.

Accounting was built for the computer age in 1211 AD, long before mechanical computers actually existed, by a bank in Florence which was the first to use the double entry accounting system. Friar Luca Pacioli was the first to document that double entry method in 1494 AD and the double entry method became wide spread, used around the world.  Two advantages of double entry accounting had over single entry accounting were (a) superior error detection capabilities and (b) the ability to distinguish an unintentional error from an intentional error (i.e. fraud).

But it was not until electronic computers were invented that accounting had the machine driven environment it truly needed to take advantage of double entry accounting’s real features.  Before electronic computers were invented, human “computers” entering transactions manually into paper ledgers.  This was limiting.

To see the advantage computer accounting provided one need only look at the growth in global commerce since the computer was invented. Consider the size of global multinational enterprise today. Would that size of organization even be possible if computers did not exist? Very doubtful.

While the tools have changed, the mentality of the accountant has not really changed that much. Accountants continue to be constrained by their “paper-based” medieval thinking about how to approach financial accounting, reporting, auditing, and analysis. That mentality will eventually change. That change might be slow.  But it will occur.

The Universal Digital Financial Reporting Framework is needed today so that accountants are not overwhelmed by the ever increasing volume and complexity of financial transactions.

Auditing is already broken, people just don’t seem to recognize that yet. Accountants might even be in denial.  New ideas are necessary. The Fourth Industrial Revolution is a real thing.

To understand XBRL-based digital financial reporting it helps to think of it in terms of levels similar to how levels are helpful in understanding the capabilities of self driving cars. Here is an overview of the levels related to financial reporting as I see them: (An example of each level is provided and here are more details about the levels; this VIDEO explains the levels; this PDF presentation explains the levels)

• Level 0: Not machine readable.
• Level 1: Machine readable, nonstandard, structured for presentation.
• Level 2: Machine readable, nonstandard, structured for meaning, no taxonomy (a.k.a. dictionary), no rules, no report model.
• Level 3: Machine readable, global standard syntax, structured for meaning, with taxonomy (a.k.a. dictionary), incomplete rules, incomplete high-level report model. (Level3a shows XBRL calculations also removed)
• Level 4: Machine readable, global standard syntax, structured for meaning, with taxonomy (a.k.a. dictionary), complete set of rules provided, incomplete high-level report model.
• Level 5: Machine readable, global standard syntax, structured for meaning, with taxonomy (a.k.a. dictionary), complete set of rules provided, complete global standard high-level report model, yields PROVEN properly functioning system and UNDERSTANDABLE report information.
• Level 6: All of Level 5 PLUS blockchain-anchored XBRL to increase trust.
• Level 7: All of Level 6 PLUS blockchain-anchored transactions and events.

What is important to understand is that anything less than LEVEL 5 simply cannot work for financial reporting schemes like US GAAP, IFRS, UK GAAP.  To understand why, read the Essence of Accounting.

Proof that Level 3 (incomplete set of rules) does not work is provided by my quarterly measurements for about six years, measurements provided by XBRLogic, measurements provided by XBRL Cloud, measurements provided by the XBRL US Data Quality Committee, Toppan Merrill urging companies to take quatliy seriously, and plenty of other information.  Proof that Level 4 (incomplete high-level model) does not work can be understood by trying to extract information from XBRL-based reports.

For XBRL-based digital financial reporting to even get out of the gates and to be considered for use in the enterprise, it actually needs to work and it needs to provide some sort of benefit. "Bolting on" XBRL at the end of an already outdated work flow simply will not do the trick.

To learn more start with Essentials of XBRL-based Digital Financial Reporting.

The excellent graphic below helps to explain the levels. Level 1 is like the "Data" image below.  Level 5 is like "Knowledge" image.  Levels 2, 3, and 4 relates to leaving out some important information or knowledge.  It is only with Level 5 that you can achieve Insight and Wisdom.

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Fortified XBRL

XBRL Chain

An Economic Case for Transparency in Private Equity

An Economic Case for Transparency in Private Equity: Data Science, Interest Alignment and Organic Finance

Distributed distributed ledgers (i.e. blockchain or otherwise) and XBRL are a match made in heaven.  Blockchain-anchored XBRL takes XBRL-based digital financial reporting to an entirely new level of usefulness.  Both transparency and trust are enhanced.

XBRL-based digital reports provide several capabilities: (1) a high-quality "payload" of machine readable reported facts, (2) a machine readable logical description of the "model" that payload, (3) machine readable declarative "rules" that help control processes and manage quality, and (4) a global standard technical syntax that enables the physical "transport" of the payload, model, and rules.

Digital distributed ledgers which a lot of people refer to as blockchain provides several additional capabilities: (1) an unchangeable record of a report transaction, (2) enhanced transparency because every detail can be tracked and repeated, (3) enhanced trust due to an inability to unintentionally or intentionally tamper with a report, (4) a plethora of service enhancements because of the enhanced transparency and trust.

While XBRL-based digital financial reports provide a high quality universal financial reporting framework that is both human-readable and machine-readable; general business reporting can benefit from the proven best practice based methods created for financial reporting.

I am not the only one that sees the benefits of blockchain, smart contracts, and the other "stuff" that makes up a digital distributed ledger.  XBRLChain has similar ideas. This one hour video explains what they are thinking.  Auditchain has their ideas which you can read in their white paper. Logical Contracts focuses on smart contracts that are logic-based declarative rules business professionals can understand (as contract to imperative or procedural software code as smart contracts).

If you don't understand the difference between imperative and declarative you should consider reading this article.

XBRLChain has a working prototype you can try.  I created a MOCK BLOCKCHAIN DIGITAL LEDGER to try and communicate my ideas. It does not actually work but it will give you an idea of what I am trying to achieve.

Logical Contracts has a prototype you can fiddle with related to smart contracts.

The Sustainability Accounting Standards Board (SASB) has published an XBRL Taxonomy that is worth having a look at.  This is the press release announcing the XBRL Taxonomy. Also, they are taking public comments.  You can download the SASB XBRL Taxonomy and fiddle with it, learn from it, test your software, etc.

If you want a quick way to look at the SASB XBRL Taxonomy (and you have a bit of patience as this page loads); this web page shows an overview of the  XBRL presentation relations of the entire XBRL taxonomy. (There are about 19,000 lines on the HTML page.)

You can get to the SASB XBRL Taxonomy terms online here:

https://s3-us-west-2.amazonaws.com/sasb.xbrl.taxonomy/sasb.xsd

Here is the SASB XBRL Taxonomy entry point:

https://s3-us-west-2.amazonaws.com/sasb.xbrl.taxonomy/sasb-entryPoint-all.xsd 

You can view the SASB XBRL taxonomy here.