Digital Financial Reporting

Knowledge graphs, DAGs (a.k.a. directed acyclic graphs), Merkle Trees, and Merkle Proofs will transform (are transforming) accounting, reporting, auditing, and analysis profoundly and forever.

As I have pointed out previously, an XBRL-based financial report is a knowledge graph.  Not only are such reports knowledge graphs, they are special types of knowledge graphs that don't have "loops" or cycles. Those special types of knowledge graphs are called directed acyclic graphs.

A Merkle DAG is a type of Merkle Tree. You can create a Merkle DAG from the information contained within an XBRL-based digital financial report.  When thinking about this, most software engineers think about a hash of the XBRL technical syntax that makes up the report.  But you can also think of this while considering the logic of the digital financial report.  That logic is represented by all of the rules related to the report that has been represented using the XBRL technical syntax.

A Merkle proof is an approach to verifying that information stored, transferred, handled, processed, or otherwise used by a computer has not been changed or otherwise tampered with.  You can also verify that the rules used to verify the logic of the report have not been changed.

So, for example, an auditor can verify that an XBRL-based financial report is considered complete, consistent, and properly functioning and the set of rules used to make that determination can be both defined and specified; included in the Merkle DAG and proven using the Merkle proof.

My method specifies a minimum set of information that must be used to verify an XBRL-based financial report.  Effectively, that method defines a level 5 financial report.

If you use Merkle trees and Merkle proofs to verify the report and put those hashes on a publically available digital distributed ledger then you can make known specifically what was reported, understand what information was used to verify that reported information, and be sure that the information has not been tampered with. This, I guess, is how you would create a level 6 digital financial report.

If you use a Merkle tree and Merkle proof at the transaction level you could not only verify the report but also verify the set of transactions which were used to generate that report.  This, I guess, is how you would create a level 7 digital financial report.

Wow!  This is all based on mathematics.  Heres is a prototype XBRL-based financial report plus 94% of the rules that I have come up with to make that report consistent with my method. Here is another prototype that includes the transactions and, I believe, has 100% of the core rules necessary.

Accountants, I am telling you; you might want to read the Essence of Accounting.

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What is a Merkle Tree?

Amazon QLDB