Digital Financial Reporting

Auditchain announced that they will use NFTs for accounting and disclosure controls. What exactly does that mean?  Well, here is financial accounting and reporting knowledge that I put into machine-readable form using the global standard XBRL.  This Microsoft 10-K financial report plus the rules that I added is an example of using those machine-readable rule to verify that a financial report is properly functioning.

A problem with the information on the internet is that there is no real quality control.  That is true even with information provided on government web sites such as the Securities and Exchange Commission (SEC) EDGAR system.  Look at the errors that I found in the XBRL-based financial reports submitted to the SEC.  I am not the only one that finds issues with those reports.

And it is not just the XBRL-based financial reports that are submitted to the SEC that have issues.  XBRL-based financial reports submitted to the ESMA have similar issues.

There is a bit of a "chicken or the egg" type of problem.  Those XBRL-based financial reports simply cannot be of high quality unless the proper rules are provided to verify and prover the information is of high quality. It is the rules that provide the control necessary to guarantee the quality level necessary. But creating the rules is time consuming.  This is kind of like Wikipedia; excellent free resource, but who creates it?

In that article, it says:

"Non-fungible tokens representing the controls are issued to the curators, and royalties are allocated between curators and validators who audit and provide assurance that the machine-readable logic works correctly. Royalties will be allocated in AUDT, the settlement and Auditchain Protocol governance token."

Here is the Auditchain roadmap.

So here are some NFT basics. I am trying to figure out how staking works.  I see this as an excellent business model that is not based on billing by the hour.

Before you write this of in your mind, I would recommend that you read New Rules for the New Economy.

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Auditchain REVIEW (Video)

This video, Internet Knowledge, featuring James Burke, is very appropriate given what is going on today.

A fundamental premise that I seem to see is the following:  In any decision, you are constrained by your knowledge at the time you make that decision (e.g. thinking inside the box).  The problem is that the view from "inside the box" does not necessarily always play out.

According to Burke, the pace of change is not even in first gear yet.  From the perspective of "inside the box" it looks like the pace of change is rapid. But change is just getting started. We are in a period of transformational confusion.

Burke points out, "If institutions stand too long in the jungle; something will eat you." This will apply to the institution of accountancy.

I pointed out what a knowledge graph is, that XBRL is a standard formal syntax for representing a knowledge graph, and that a financial report is a knowledge graph.

GRAILOG is a standard model for representing logic within a knowledge graph. Grailog was developed by Harold Boley.  For more information see this presentation.

I was reading through The Knowledge Graph Cookbook: Recipes that Work (which mentions XBRL on page 108) and that book mentioned the STW Thesaurus for Economics. That resource is managed under the umbrella of the International Society of Knowledge Organization (ISKO). You can have a look at the machine-readable and human-readable of the Thesaurus for Economics here. Also, you might want to have a look at the Finaicial Industry Business Ontology (FIBO).

Folks, what needs to exist is an industry managed Standard Thesaurus for Financial Accounting, Reporting, Auditing, and Analysis!  Professional knowledge engineers need to be engaged to help create this.  Accountants need to learn how to effectively communicate with knowledge engineers.

This information would provide a good starting point: 

• Logical Theory Describing Financial Report
• Essence of Accounting
• Principles
• Method
• Framework

 The institution of accountancy really needs to stop messing around and get with the program.  This should not be an academic exercise, it should be an industry driven initiative. We should start with US GAAP and IFRS, but also consider other financial reporting schemes. This initiative should not be driven by standards setters and regulators.  Yes, they should play a part but they should just be one of the groups around the table.

The root of the knowledge graph is the double entry accounting model, the accounting equation, and the fundamental accounting concepts.

That standard thesaurus can be used to construct things like the accounting oracle.

Anyone interested in participating please contact me.

Warren Buffett is credited with coining the phrase, "Accounting is the language of business."  But as the Corporate Finance Institue points out, there are actually three languages of business: accounting, finance, and economics.

As is pointed out in the article by George Doris, KORZYBSKI AND GENERAL SEMANTICS*, communications is hard.  It is not the "traps in language" that cause communications problems, rather it is our ignorance of those traps that cause communications problems.

I am an accountant so I will stick with accounting.  I will use the example of the general purpose financial report whose purpose is to communicate the financial status and financial performance of an economic entity as an example.

The article states the following:

Certain very important relationships are illustrated by the analogy: 

1. Just as the map is not the territory, the word is not the thing. 
2. Just as the map cannot represent all of the territory, words cannot say all about anything. 
3. Just as we can make a map of a map, we can make a statement about a statement, and use words about words. 

We have been considering some of the problems arising from distorted relationships between ‘maps’ and ‘territories’. Yet the potential for error does not stop there – the relationship between the map and the mapmaker is important, and the latter may bring other distortions in creating his or her ‘meaning’, especially in interpersonal communication.”

A general purpose financial report is not the economic entity itself.  If the language used to describe the financial status and financial performance of the economic entity does not have good "semantic hygiene" that makes effective communications harder or even impossible.

At its essence, accounting is a mathematical model. Yes, financial accounting and reporting can be complex. Can that communication, the language of business, be digitized?  Sure it can, if the digitization is done correctly.  Computers are like babies.  Not like a child, like a baby.  A computer needs to be led by the hand using machine readable rules.  Those sentences and assertions can be articulated in the form of a knowledge graph. But if the rules are not clear because the language of accounting and reporting is not clear, the results will be less than satisfying.

It is time that the semantic hygiene of accounting, reporting, auditing, and analysis to be improved. First steps have been taken. Things like accounting oracles will be built. But all these incredibly useful tools will only be as good as the language that provides the underpinnings, the foundation, the keystones.

One final thing that article points out.  “We live in a world of process, change and dynamic structure, yet we map it with static words.” Folks, there are many other approaches.  Artificial intelligence is real, but if the semantic hygiene is not improved mistakes will be made.

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Financial Reporting Semantics