Digital Financial Reporting

The Future of Work is Not Corporate — It’s DAOs and Crypto Networks points out that the future of work is not the corporation, it is the DAO or decentralized autonomous organization.

The purpose of a DAO is to facilitate coordination. DAOs are for facilitating human cooperation via collective ownership. A DAO is a community that allows its members to coordinate funds and resources toward the achievement of some specific goal.  A DAO is a new mechanism to coordinate work. DAOs give communities coordination superpowers. DAO members are equity holders in the DAO.  That equity can grow, and grow, and grow.

The article points out that not all DAOs are necessarily "decentralized" or "autonomous".  It is best to think of DAOs as organizations that leverage the connectivity and other capabilities of the internet that are collectively owned and controlled by its members.

Participants fill different roles in a DAO.  Here are some examples provided by the article referenced above: 

• Core contributors: (work-to-earn) Core contributors are how we typically think of employees today; people focusing full-time on a project or organization. The singular focus allows the individual to be embedded within the project and amass contextual and strategic knowledge.
• Bounty hunters: (contribute-to-earn) Bounty Hunters complete clearly defined work for an agreed upon price and / or duration of time. 
• Network participants: (participate-to-earn) Within any given DAO, this is where the majority of people will fall. Networks gain strength with more activity and additional participants, yet, for years, users, consumers, and participants have been adding value to networks without capturing their share of value. Functioning more like open economies than closed organizations, DAOs will reward each individual contribution based on the value it provides, regardless of who it comes from. This means that everyday actions that are valuable to a network will be turned into income-earning opportunities.

A DAO is a great way to build a product and bring it to market.

Here is more information about DAOs:

• What is a DAO and What is it Used for?
• Decentralized Autonomous Organizations (DAO)
• Where to Pay Attention to Blockchain in 2022
• ConstitutionDAO
• DAOhaus
• How to Create a DAO

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DAOs Are Not Scary, Part 1: Self-Enforcing Contracts and Factum Law

DAOs, DACs, DAs, and More: An Incomplete Terminology Guide

Create DAO using Aragon.org

Create DAO using Juicebox

Create DAO using DAOhaus

What is DAO?

We are in the midst of a great upheaval.  As Levine and van Pelt point out in their book, "we are in a time of profound, unrelenting, and accelerating change of a magnitude and scope unequaled since the Industrial Revolution."  We are transitioning from an analog, industrial economy to a digital, knowledge economy.  We are transitioning from a national focus to a global focus.

As part of this transition from analog to digital, leaders within the institution of accountancy along with others have created the global standard XBRL technical syntax.

The next step is to create a global master plan for XBRL-based digital general purpose financial reports. Auditors should participate in the creation of this plan.

Today, there is pretty much a literal free-for-all when it comes to creating XBRL taxonomies for financial reporting and how to best create such XBRL taxonomies is blurred and confused for most.  Regulators are taking different approaches.  There is consensus that the quality of XBRL-based reports submitted to the SEC and ESMA are not of the quality that they need to be.

This free-for-all and the quality issues causes confusion and increases risk for pretty much everyone including software vendors, auditors, regulators, and economic entities that report.  Making the confusion go away would help pretty much everyone.

And what if non-regulated private companies want to move from analog to digital; what are they to do?  There is no global standard formal approach that they can adopt that is proven to work so well that they could implement digital reporting within their organization.

The Seattle Method and the Standard Business Report Model (SBRM) could end up as de facto best practices or good practices based approaches to implementing XBRL-based digital financial reporting. There are already over eight groups implementing or publically experimenting with these ideas that I can make you aware of at this point. Others I know of are experimenting in private.

XBRL-based digital general financial reports may never replace all paper-based or e-paper based general purpose financial reports. But they are a good tool if they work reliably and predictably.  If there is not agreement as to what information is being conveyed by the reports and the quality of that information, there is no way such reports can ever be audited.

Optimally, there would be one set of standard XBRL-based digital financial report approaches.  Not sure that will ever happen, but it is worth trying for and seeing what happens.  In the United States, I see these use cases and markets (best information that I have): 

• Public company financial reporting, about 6,000 companies.
• Private company financial reporting, about 85,000 larger companies with over 500 employees and up to 25,000,000 medium, small, and micro companies.
• State and local governmental financial reporting, about 110,000 states, towns, villages, cities, school districts, public utility districts, transit authorities, and so forth.
• Not-for-profit financial reporting, about 350,000 not-for-profits that report to the Federal Government in support of federal grants.
• ERISA pension plans financial reports, about 850,000 plans.
• DEFI financial reporting, about 7,000 crypto currencies and growing.
• Personal financial statements, about 1,000,000 individuals

But if XBRL-based digital financial reporting does not work (i.e. not "Better"), takes more time (i.e. is not "Faster", costs more money (i.e. is not "Cheaper"), or is too hard to use; then XBRL-based reporting by those groups above is a non-starter.

If the SEC or ESMA lifted their XBRL reporting mandates today, how many companies would continue to use XBRL?  Probably 100%.  Why?  Because current approaches don't provide enough value, they are not BETTER, they are not FASTER, and they are not CHEAPER.

From what I can see, there are THREE current approaches: 

1. Standard Forms: Comparability is good, information quality is good, but there is a loss of idiosyncratic detailed information.  This is useful in some cases even if detailed information is lost.
2. Customized Free Form (or uncontrolled) Models: Idiosyncratic details are preserved; but information comparability is bad and information quality is poor.
3. Customized but Controlled Models: Comparability is good, information quality is good, and idiosyncratic details of economic entities is preserved.  Most regulators that use approach #1 will change to this approach when it works effectivly I predict.

This graphic below provides a comparison of the three approaches that was inspired by an academic paper that I referenced in another blog post:

I hold the Seattle Method out as an example of what can be achieved. Whether the leadership in the institution of accounting can put something better together, time will tell.  Whether the market will accept XBRL-based digital financial reporting is an unknown. 

If you want to understand how change unfolds, I would encourage you to read the book The Great Upheaval.  If you want to understand the environment in which all this will be operating, read New Rules for the New Economy. If you want to understand the details of the Seattle Method, I would point you to these resources.

Should you want to master XBRL-based digital financial reporting, here you go.

It will be interesting to see how all this unfolds.

I ran across a very good academic paper that was published in 2013. The title of the paper is Critical Reflection on XBRL: A “Customisable Standard” for Financial Reporting?  In the paper they compare two approaches for creating XBRL taxonomies and reports and they provide the following graphic from page 126 of that paper.  They call the approaches "Standardization" which means a forms-based implementation with no extensions allowed and "Customization" which means extensions are allowed.  Then at the bottom they provide information about the resulting ability to consume reported information and the idiosyncratic details provided within the report.

That is a good graphic, but the graphic is incomplete.  And so I created my own graphic inspired by the graphic provided in the above academic paper.  What I did was break the "Customization" down into two distinct parts: 

• "Freeform Model" is where an implementer allows extensions to taxonomy report elements and to the creation of a report model but DOES NOT PROVIDE MECHANISMS TO CONTROL the extensions or reconfigurations to keep them within permitted boundaries.  
• "Controlled Model" is also where an implementer allows extensions to taxonomy report elements and to the creation of a report model and ALSO PROVIDES A MECHANISM TO CONTROL the extensions and reconfigurations of the report model in order to keep them within permitted and expected boundaries. 

This graphic is my enhanced version of what the paper above provides.  I have also color coded the consequences of the implementation decision:

Granted, the Seattle Method did not exist in 2013 when that academic paper was written.  But now it does exist.

Today, most existing XBRL implementations use the Standard Forms approach.  Those that do allow for customization do not control the report model customization well, if at all really; as a result they have quality issues.

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Adopting XBRL in Italy: Early Evidence of Fit Between Italian GAAP and Reporting Practices of Non-listed Companies

I got a Burroughs adding machine for Christmas. Mine is serial number 3-347317 which means it was probably made between May 1916 and Feburary 1917.  Per the video Classiest adding machine ever (1922) this is the "machine that built capitalism".  Burroughs had an entire line of "figuring", "bookkeeping" and "adding" machines.

This adding machine still works which is very cool.

The podcast How to Modernize Accounting (XBRL, Knowledge Systems, Immutable Distributed Ledgers) will help you get your head around the big changes that are happening to accounting, reporting, auditing, and analysis.

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If you want to understand where accounting, reporting, auditing, and analysis is going it helps to understand where it has been.  Watch this video about the Burroughs adding machine. Read about its history. (Burroughs Corportation)